As filed with the Securities and Exchange Commission on August 13, 1997
Registration No. 333-_____
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PALATIN TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
DELAWARE 2835 95-4078884
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
214 CARNEGIE CENTER, SUITE 100 214 CARNEGIE CENTER, SUITE 100
PRINCETON, NJ 08540 PRINCETON, NJ 08540
(609) 520-1911
(Address and telephone number of (Address of principal place of business
principal executive offices) or intended principal place of business)
COPY TO:
JOHN J. MCDONOUGH, VICE PRESIDENT & IRWIN M. ROSENTHAL, ESQ.
CHIEF FINANCIAL OFFICER RUBIN BAUM LEVIN CONSTANT & FRIEDMAN
214 CARNEGIE CENTER, SUITE 100 30 ROCKEFELLER PLAZA, 29TH FLOOR
PRINCETON, NJ 08540 NEW YORK, NY 10112
(609) 520-1911 (212) 698-7700
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: from time to time, following
the effective date of this registration statement.
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
class of Dollar maximum maximum Amount of
securities to be Amount to be offering price aggregate registration
registered registered per unit (1) offering price(1) fee
- ---------------- ------------- -------------- ----------------- -----------
Common Stock $24,965,844.75 $1.75 $24,965,844.75 $7,565.41
(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933 and
based on the average of the high and low prices of the registrant's common
stock reported on the OTC Bulletin Board(R) on August 11, 1997.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Subject to completion, dated August 13, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any State in which such offer, sale or solicitation would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS
PALATIN TECHNOLOGIES, INC.
UP TO 14,266,197 SHARES OF COMMON STOCK
$.01 PAR VALUE PER SHARE
This Prospectus relates to the offering (the "Offering") of up to
14,266,197 shares (the "Offered Shares") of the common stock, $.01 par value per
share (the "Common Stock") of Palatin Technologies, Inc. (the "Company"), which
may be sold from time to time by the selling stockholders named in this
Prospectus (each, a "Selling Stockholder," together, the "Selling
Stockholders").
The Common Stock is traded on the OTC Bulletin Board(R) (the "Bulletin
Board"), under the symbol "PLTN." The last reported sale price of Common Stock
on the Bulletin Board on August 11, 1997 was $1 3/4.
THE OFFERED SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Underwriting discounts Proceeds to issuer or
Price to public and commissions other persons
Per unit - (1) - (2) - (3)
Total - (1) - (2) - (3)
========== =================== ===================== =====================
(1) Selling Stockholders may, without notice to the Company, sell the Offered
Shares from time to time directly to purchasers or through underwriters,
brokers, dealers or agents, on securities exchanges, in the
over-the-counter market, and/or in privately negotiated transactions. The
price of the Offered Shares to the public will, therefore, depend on the
time and nature of each sale. See "Plan of Distribution."
(2) Each Selling Stockholder will pay all underwriting discounts and selling
commissions applicable to the sale of such Selling Stockholder's Offered
Shares. Sales may be effected from time to time on securities exchanges,
in the over-the-counter market, and/or in privately
<PAGE>
negotiated transactions, and accordingly underwriting discounts and selling
commissions will vary and may or may not apply to any given sale. See "Plan
of Distribution."
(3) The Company will receive no proceeds from the sale of the Offered Shares.
The Company will bear all expenses, estimated at $_________, incurred in
connection with the registration of the Offered Shares under the
Securities Act of 1933, as amended (the "Securities Act") and
qualification or exemption of the Offered Shares under state securities
laws, excluding fees of legal counsel for any Selling Stockholder.
Proceeds to Selling Stockholders will vary depending on the time and
nature of each sale of the Offered Shares. See "Use of Proceeds" and "Plan
of Distribution."
THE DATE OF THIS PROSPECTUS IS _______ __, 1997
<PAGE>
[INSIDE FRONT COVER PAGE OF PROSPECTUS ]
- ------------------------------------------------------------------------------
AVAILABLE INFORMATION
The Company is a reporting company under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The reports and other information filed
by the Company may be inspected and copied at the public reference facilities of
the Securities and Exchange Commission (the "Commission") in Washington, D.C.,
and at its Regional Offices at Seven World Trade Center, 13th Floor, New York,
NY 10048, and at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington D.C.,
20549, at prescribed rates. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of that Web
site is http://www.sec.gov.
INCORPORATION BY REFERENCE
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any of the
information that was incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). The address and
telephone number to which such request is to be directed are: John J. McDonough,
Vice President, Palatin Technologies, Inc., 214 Carnegie Center, Suite 100,
Princeton, NJ 08540, telephone (609) 520-1911.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF ANY OUTSTANDING WARRANTS OR OPTIONS, AND GIVES NO EFFECT TO THE
PROPOSED INCREASE IN AUTHORIZED CAPITAL OF THE COMPANY AND REVERSE STOCK SPLIT,
TO BE SUBMITTED TO THE STOCKHOLDERS FOR APPROVAL ON AUGUST 21, 1997. SEE
"DESCRIPTION OF SECURITIES."
CERTAIN STATEMENTS IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: DELAYS IN PRODUCT DEVELOPMENT; PROBLEMS OR DELAYS WITH CLINICAL
TRIALS; FAILURE TO RECEIVE OR DELAYS IN RECEIVING REGULATORY APPROVAL; LACK OF
ENFORCEABILITY OF PATENTS AND PROPRIETARY RIGHTS; LACK OF REIMBURSEMENT; GENERAL
ECONOMIC AND BUSINESS CONDITIONS; INDUSTRY CAPACITY; INDUSTRY TRENDS;
COMPETITION; MATERIAL COSTS AND AVAILABILITY; CHANGES IN BUSINESS STRATEGY OR
DEVELOPMENT PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS AND DEPLOYMENT OF
CAPITAL; BUSINESS ABILITIES AND JUDGMENT OF PERSONNEL; AVAILABILITY OF QUALIFIED
PERSONNEL; CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS;
AND OTHER FACTORS REFERENCED IN THIS PROSPECTUS. WHEN USED IN THIS PROSPECTUS,
THE WORDS "BELIEVES," "ANTICIPATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
THE COMPANY
The Company is a development-stage biopharmaceutical company dedicated to
developing and commercializing products and technologies for diagnostic imaging,
cancer therapy and ethical drug development utilizing peptide, monoclonal
antibody and radiopharmaceutical technologies. The Company concentrates its
activities in two technology areas, each of which the Company believes may be
used to develop products with potential diagnostic and therapeutic applications.
These technologies involve the Company's (i) patent-pending Metal Ion-induced
Distinctive Array of Structures ("MIDAS") metallopeptide technology ("MIDAS
technology") and (ii) patented and patent-pending direct radiolabeling
technology.
The Company believes that the MIDAS technology represents a platform
technology which may enable the design and synthesis of novel peptide analogs or
mimics. Further, the Company believes that its MIDAS technology may provide the
Company with the flexibility to generate its own pharmaceutical products, and
the ability to target and complement existing product portfolios and
technological bases of other companies. The Company intends to seek to enter
into collaborative arrangements to assist in development, manufacturing and
marketing of certain proposed products
1
<PAGE>
utilizing the MIDAS technology. The Company has entered into a license
option agreement as to certain proposed products based on MIDAS technology. See
"Business -- MIDAS Technology."
The Company is developing two proposed products incorporating its direct
radiolabeling technology, (i) LeuTech, an infection and inflammation imaging
product, and (ii) PT-5, a radiotherapeutic peptide somatostatin analog for
cancer therapy. The Company is devoting substantial efforts and resources to the
development of LeuTech, which the Company believes will be its first proposed
product to enter Company-sponsored clinical trials. The Company anticipates
seeking one or more marketing partners for LeuTech prior to product approval.
See "Business --Direct Radiolabeling Technology."
The Company is at an early stage of development and has not yet completed
the development of any products based on either its MIDAS technology or its
direct radiolabeling technology. Accordingly, the Company has not begun to
market or generate revenues from the commercialization of any such products. It
will be a number of years, if ever, before the Company will recognize
significant revenues from product sales or royalties. The Company's technologies
and products under development will require significant time-consuming and
costly research, development, pre-clinical studies, clinical testing, regulatory
approval and significant additional investment prior to their commercialization,
which may never occur. There can be no assurance that the Company's research and
development programs will be successful, that its products will exhibit the
expected biological results in humans, will prove to be safe and efficacious in
clinical trials or will obtain the required regulatory approvals or that the
Company or its collaborators will be successful in obtaining market acceptance
of any of the Company's products. There can be no assurance that the Company
will be successful in entering into strategic alliances or collaborative
arrangements on commercially reasonable terms, if at all, or that such
arrangements will be successful, or that the parties with which the Company will
establish arrangements will perform their obligations under such arrangements.
The Company or its collaborators may encounter problems and delays relating to
research and development, regulatory approval, manufacturing and marketing. The
failure by the Company to address successfully such problems and delays would
have a material adverse effect on the Company. In addition, no assurance can be
given that proprietary rights of third parties will not preclude the Company
from marketing its proposed products or that third parties will not market
superior or equivalent products.
Since June 25, 1996, the effective date of the Company's Merger (as
"Merger" is defined in "Business -- History and Merger") with RhoMed
Incorporated ("RhoMed"), now a wholly-owned subsidiary of the Company, the
business of RhoMed has represented the on-going business of the Company. See
"Business -- History and Merger."
The address of the Company's principal executive offices is Palatin
Technologies, Inc., 214 Carnegie Center, Suite 100, Princeton, NJ 08540, and the
telephone number is (609) 520-1911.
2
<PAGE>
THE OFFERING
Common Stock
outstanding
as of
August 13, 1997.....12,164,444 shares of Common Stock.(1)
Offered Shares......14,266,197 shares, of which 434,859 are outstanding on the
date of this Prospectus. The Offered Shares consist of: (i)
up to 11,111,290 (2) shares of Common Stock issuable on
conversion of 137,780 shares of the Company's Series A
Convertible Preferred Stock, $.01 par value per share
("Series A Convertible Preferred Stock"), issued in a
private offering to accredited investors which had a final
closing as of May 9, 1997; (ii) up to 1,111,129 shares of
Common Stock issuable on conversion of 13,778 shares of
Series A Convertible Preferred Stock issuable on exercise of
warrants ("Preferred Stock Placement Warrants") issued to
Paramount Capital, Inc. (the "Placement Agent") and/or its
designees in connection with the private offering of Series
A Convertible Preferred Stock described above; (iii) up to
276,498 shares of Common Stock issuable on exercise of Class
C Warrants, issued in connection with the Merger; (iv) up to
711,184 shares of Common Stock issuable on exercise of
warrants ("Common Stock Placement Warrants") issued to
designees of the Placement Agent in
- --------
(1) Does not include (i) 11,111,290 shares of Common Stock issuable on
conversion of currently outstanding shares of Series A Convertible
Preferred Stock; (ii) 2,775,409 shares of Common Stock issuable upon (a)
exercise of warrants to purchase Common Stock at an average weighted price
of $1.91 per share and (b) conversion of Series A Convertible Preferred
Stock issuable upon exercise of Preferred Stock Placement Warrants at a
price equivalent to $1.36 per share of Common Stock; (iii) 3,352,505 shares
of Common Stock issuable upon exercise of outstanding stock options at a
weighted average price of $2.00 per share, including 739,798 shares
issuable upon exercise of outstanding stock options granted under the
Company's 1996 Stock Option Plan, subject to stockholder approval of the
plan; and (iv) 1,760,202 shares of Common Stock reserved for issuance of
future options under the Company's 1996 Stock Option Plan, subject to
stockholder approval of the plan. See "Management," "Principal
Stockholders," "Certain Transactions" and "Description of Securities."
(2) This number includes an aggregate of 82 fractional shares which would be
cashed out upon conversion of all Series A Convertible Preferred Stock
given the ownership distribution as of the date of this Prospectus. The
exact number of fractional shares to be cashed out may change if any
holders of Series A Convertible Preferred Stock combine or divide their
current holdings.
3
<PAGE>
connection with RhoMed's private placement of RhoMed common
stock in 1996; (v) up to 156,682 shares of Common Stock
issuable on exercise of Class B Warrants issued in
connection with RhoMed's offering of Senior Bridge Notes and
Class B Warrants (the "RhoMed Class B Offering"); (vi) up to
7,834 shares of Common Stock issuable on exercise of
warrants ("Class B Placement Warrants") issued to designees
of the Placement Agent in connection with the RhoMed Class B
Offering; (vii) up to 552,990 shares of Common Stock issued
or issuable on exercise of Class A Warrants issued in
connection with RhoMed's offering of Senior Bridge Notes and
Class A Warrants (the "RhoMed Class A Offering"), of which
179,218 shares of Common Stock are outstanding as of the
date of this Prospectus; (viii) up to 82,949 shares of
Common Stock issuable on exercise of warrants ("Class A
Placement Warrants") issued to designees of the Placement
Agent in connection with the RhoMed Class A Offering; and
(ix) 255,641 shares of Common Stock issued to an affiliate
of the Company's largest creditor to pay accrued interest as
of April 30, 1997. See "Description of Securities,"
"Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital
Resources" and "Certain Transactions."
Proceeds to the
Company............ None. Selling Stockholders will sell the Offered Shares for
their own accounts.
Risk Factors........Purchase of Offered Shares involves a high degree of risk.
See "Risk Factors."
Trading symbol......PLTN.
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE OFFERED SHARES IS HIGHLY SPECULATIVE IN NATURE, INVOLVES A
HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD A
LOSS OF THEIR ENTIRE INVESTMENT. EACH PROSPECTIVE INVESTOR SHOULD CONSIDER
CAREFULLY THE RISKS INHERENT IN AND AFFECTING BOTH THE BUSINESS OF THE COMPANY
AND THE VALUE OF THE COMMON STOCK AND SPECULATIVE FACTORS INCLUDING, WITHOUT
LIMITATION, THE FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION.
EARLY STAGE OF DEVELOPMENT; UNCERTAINTY OF PRODUCT DEVELOPMENT;
TECHNOLOGICAL UNCERTAINTY. The Company is at an early stage of development and
has not yet completed the development of any products based on either its MIDAS
technology or its direct radiolabeling technology. Accordingly, the Company has
not begun to market or generate revenues from the commercialization of any such
products. It will be a number of years, if ever, before the Company will
recognize significant revenues from product sales or royalties. The Company's
technologies and products under development will require significant
time-consuming and costly research, development, preclinical studies, clinical
testing, regulatory approval and significant additional investment prior to
their commercialization, which may never occur. There can be no assurance that
the Company's research and development programs will be successful, that its
products will exhibit the expected biological results in humans, that its
products will prove to be safe and efficacious, that its products will obtain
the required regulatory approvals, demonstrate substantial therapeutic or
diagnostic benefit, be commercialized on a timely basis, experience no design or
manufacturing problems, be manufactured on a large scale, or be economical to
market, or that the Company or its collaborators will be successful in obtaining
market acceptance of any of the Company's products or generate sufficient
revenue to support research and development programs. There can be no assurance
that the Company will be successful in entering into strategic alliances or
collaborative arrangements on commercially reasonable terms, if at all, that
such arrangements will be successful, or that the parties with which the Company
will establish arrangements will perform their obligations under such
arrangements. The Company or its collaborators may encounter problems and delays
relating to research and development, regulatory approval, manufacturing and
marketing. The failure by the Company to successfully address such problems and
delays would have a material adverse effect on the Company. In addition, no
assurance can be given that proprietary rights of third parties will not
preclude the Company from marketing its proposed products or that third parties
will not market superior or equivalent products. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has
incurred net operating losses since its inception (January 28, 1986) and, as of
March 31, 1997, had an accumulated deficit of approximately $11.7 million, which
has increased to date. The Company anticipates incurring additional losses over
at least the next several years and such losses are expected to increase as the
Company expands its research and development activities relating to its MIDAS
technology and its direct radiolabeling technology. To achieve profitability,
the Company, alone or with others, must successfully develop its technologies
and products, conduct preclinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture, introduce and market such
technologies and products. The time required to reach profitability is highly
uncertain, and there can
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<PAGE>
be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING AND ACCESS TO CAPITAL. The Company has
incurred negative cash flow from operations since its inception. The Company has
expended, and will continue to expend in the future, if available, substantial
funds to continue its research and development programs, including preclinical
studies and clinical trials, to seek regulatory approval of its products, to
develop manufacturing and marketing capabilities, and to fund the growth that is
expected to occur if any of its proposed products are approved for marketing.
Further, the Company has significant long-term debt that is due and payable
during the fiscal years ending June 30, 1998 and 1999. The Company expects that
its existing capital resources will be adequate to make scheduled debt payments
and to fund its operations through June 1998. No assurance can be given that
there will be no events affecting the Company's operations that would deplete
available resources significantly before such time. The Company's future capital
requirements depend on many factors, including continued progress in its
research and development activities, progress with preclinical studies and
clinical trials, prosecuting and enforcing patent claims, technological and
market developments, the ability of the Company to establish product development
arrangements, the cost of manufacturing scale-up and effective marketing
activities and collaborative or other arrangements. The Company will seek to
obtain additional funds through public or private financings, including equity
or debt financings, collaborative or other arrangements with corporate partners
and others, and from other sources. No assurance can be given that additional
financing will be available when needed, if at all, or on terms acceptable to
the Company. If adequate additional funds are not available, the Company may be
required to delay, scale back or eliminate certain of its research or
development activities, its manufacturing and marketing efforts, or require the
Company to license to third parties certain products or technologies that the
Company would otherwise seek to commercialize itself. If adequate funds are not
available, there will be a material and adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
POTENTIAL VOLATILITY OF PRICE; LOW TRADING VOLUME. The market price of the
Common Stock, like that of many other development-stage public pharmaceutical or
biotechnology companies, has been highly volatile and may be so in the future.
Factors such as announcements of technological innovations or new commercial
products by the Company or its competitors, disclosure of results of preclinical
and clinical testing, adverse reactions to products, governmental regulation and
approvals, developments in patent or other proprietary rights, public or
regulatory agency concerns as to the safety of products developed by the
Company, litigation and general market conditions may have a significant adverse
effect on the market price of the Common Stock. In addition, in general, the
Common Stock has been thinly traded on the Bulletin Board, which may affect the
ability of the Company's stockholders to sell shares of the Common Stock in the
public market. There can be no assurance that a more active trading market will
develop in the future. From June 26, 1996 (the date subsequent to the date of
the Merger) to June 30, 1997, the Company's Common Stock has traded at per share
prices between $5 and $1 1/4. There can be no assurance that this high level of
volatility will not persist in the future and that purchasers of the Offered
Shares will not be adversely affected. Further, the stock market has from time
to time experienced extreme price and volume fluctuations
6
<PAGE>
that may be unrelated to the operating performance of particular companies. Such
fluctuations may adversely affect the price of the Common Stock. See "Market for
Common Stock and Related Stockholder Matters."
PATENTS AND PROPRIETARY RIGHTS, NO ASSURANCE OF ENFORCEABILITY OR
SIGNIFICANT COMPETITIVE ADVANTAGE. In general, the patent positions of companies
relying upon biotechnology are highly uncertain and involve complex legal and
factual questions. To date, there has emerged no consistent policy regarding the
breadth of claims that are properly accorded to biotechnology patents. There can
be no assurance that patents will issue from the patent applications filed by
the Company or its licensors or that the scope of any claims granted in any
patent will provide meaningful proprietary protection or a competitive advantage
to the Company. There can be no assurance that the validity or enforceability of
patents issued or licensed to the Company will not be challenged by others or,
if challenged, will be upheld by a court. In addition, there can be no assurance
that competitors will not be able to circumvent any patents issued or licensed
to the Company. In the United States, patent applications are maintained in
secrecy until they issue as patents, and thus publications in the patent
literature lag behind actual discoveries. Scientific publications also generally
appear after a patent application, if any, is filed. As a result of delayed
publication, the Company cannot be certain that its scientists were the first to
make inventions covered by its patents and patent applications.
In the event another party has also filed a patent application relating to
an invention claimed in a Company patent application, the Company may be
required to participate in an interference proceeding adjudicated by the United
States Patent and Trademark Office to determine priority of invention. The
possibility of an interference proceeding could result in substantial
uncertainties and cost for the Company, even if the eventual outcome is
favorable to the Company. An adverse outcome could result in the Company losing
patent protection for the subject of the interference, subject the Company to
significant liabilities to third parties and require the Company to obtain
license rights from third parties at undetermined cost or to cease using the
technology.
While no valid patent that would be infringed by manufacture, use or sale
of the Company's proposed products has come to the attention of the Company, the
Company's proposed products are still in the development stage, and neither
their formulations nor their method of manufacture is finalized. Moreover,
patents the claims of which would be infringed by the Company's commercial
activities may not have issued as yet. There can thus be no assurance that the
manufacture, use or sale of the Company's proposed products will not infringe
patent rights of others. The Company may be unable to avoid infringement of any
such patents and may have to seek a license, defend an infringement action, or
challenge the validity of such patents in court. There can be no assurance that
a license will be available to the Company, if at all, upon terms and conditions
acceptable to the Company or that the Company will prevail in any patent
litigation. Patent litigation is costly and time consuming, and there can be no
assurance that the Company will have sufficient resources to pursue such
litigation. If the Company does not obtain a license under any such patents, is
found liable for infringement, or is not able to have them declared invalid, the
Company may be liable for significant money damages, may encounter significant
delays in bringing products to market, or may be precluded from participating in
the manufacture, use or sale of products or methods of treatment covered by such
patents.
7
<PAGE>
The Company relies substantially in its product development activities on
certain technologies which are neither patentable nor proprietary and are
therefore potentially available to the Company's competitors. The Company also
relies on certain proprietary technologies (trade secrets and know-how) which
are not patentable. Although the Company has taken steps to protect its
unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
contractors, there can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors. If the Company's employees, scientific
consultants or collaborators develop inventions or processes independently that
may be applicable to the Company's product candidates, disputes may arise about
ownership of proprietary rights to those inventions and processes. Such
inventions and processes will not necessarily become the Company's property, but
may remain the property of those persons or their employers. Protracted and
costly litigation could be necessary to enforce and determine the scope of the
Company's proprietary rights. Failure to obtain or maintain patent and trade
secret protection, for any reason, could have a material adverse effect on the
Company.
Certain of the Company's patents are directed to inventions developed with
funds from United States government agencies or within academic institutions
from which the Company earlier acquired rights to such patents. As a result of
these arrangements, the United States government may have rights in certain
inventions developed during the course of the performance of federally funded
projects as required by law or agreements with the funding agency.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication of pending patent applications, modification of the patent term,
re-examination, subject matter and enforceability. It is not certain whether any
of these bills will be enacted into law and whether, as enacted, they would
affect the scope, validity and enforceability of the Company's patents.
Accordingly, the effect of legislative change on the Company's intellectual
property estate is uncertain. See "Business."
UNCERTAINTY OF DEVELOPMENT OF MIDAS TECHNOLOGY. The Company is engaged in
research and development on a number of product opportunities for its MIDAS
technology, including use as a thrombosis imaging agent, an infection imaging
agent and an immunostimulatory agent, and believes that MIDAS technology may
have medical applications in a variety of areas, including immune disorders,
cancers and cardiology. The Company intends to expand research and development
of MIDAS technology applications primarily through strategic alliances with
other entities. No assurances can be made regarding the establishment or the
timing of such alliances, and the failure to establish such alliances on a
timely basis could limit the Company's ability to develop MIDAS technology and
could have a material adverse effect on the Company. The Company expects to
devote resources to expand research and development of MIDAS technology to the
extent funding is available. No prediction can be made, however, as to when or
whether the areas in which there are ongoing MIDAS technology research projects
will yield scientific discoveries, or whether such research projects will lead
to commercial products. See "Business."
While the Company has entered into a License Option Agreement (the "Option
Agreement") with Nihon Medi-Physics Ltd. ("Nihon"), pursuant to which Nihon has
an option to exclusively
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license certain products based on the Company's MIDAS technology, there can be
no assurance that future payments provided for in the Option Agreement will be
made, that the Company and Nihon will ever enter into a definitive license
agreement, or that a definitive strategic alliance between the Company and Nihon
will result in the development or commercialization of any product. In the event
that Nihon gives notice of its right to negotiate a license agreement, and the
parties cannot agree on terms of such license agreement, the Company will be
required to repay certain monies to Nihon. Failure to enter into a definitive
license agreement, or being required to repay certain monies to Nihon, may have
a material adverse effect on the Company. See "Management Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
UNCERTAINTY OF DEVELOPMENT OF LEUTECH. The Company has entered into an
exclusive license agreement with The Wistar Institute of Anatomy and Biology
("Wistar Institute") for a defined field of use for the antibody and cell line
used for LeuTech, which license agreement contains certain performance criteria.
Failure to meet the performance criteria for any reason or any other event of
default under the license agreement leading to termination of the exclusive
license agreement with Wistar Institute would have a material adverse effect on
the Company. While the Company has negotiated a long-term contractual
arrangement for the manufacture of the purified antibody necessary for LeuTech,
there can be no assurance that such contractor will be able to successfully
manufacture purified antibody for LeuTech on a sustained basis, that such
contractor will remain in the contract manufacturing business for the time
required by the Company, or that the Company will be able to enter into such
contractual arrangements as to other steps and components required to
manufacture LeuTech. Such manufacture must be done under good manufacturing
practice ("GMP") requirements prescribed by the United States Food and Drug
Administration ("FDA") and other governmental agencies. To date, the Company has
only manufactured LeuTech in lots preparatory to initiating clinical trial use,
and has not determined whether commercial quantities of LeuTech in conformity
with these standards can be manufactured on a sustained basis at an acceptable
cost.
While the Company intends to file an Investigational New Drug Application
("IND") on LeuTech with the FDA on one or more selected indications in
the second half of 1997, and to complete Phase III clinical trials and file
regulatory applications to market with the FDA in the second half of 1998, there
can be no assurance that the Company's LeuTech development program will be
successful, that the FDA will permit the Company's planned clinical trials to
proceed, that LeuTech will prove to be safe and efficacious in clinical trials,
that LeuTech can be manufactured in commercially required quantities on a
sustained basis at an acceptable price, that LeuTech will obtain the required
regulatory approvals or that the Company or its collaborators will be successful
in obtaining market acceptance of LeuTech. The Company or its collaborators may
encounter problems and delays relating to research and development, regulatory
approval, manufacturing and marketing of LeuTech. Failure to develop, obtain
regulatory approval for, manufacture and market LeuTech on a timely basis would
have a material adverse effect on the Company. See "Business."
UNCERTAINTY OF DEVELOPMENT OF PT-5. The Company is discussing entering
into a collaborative arrangement with a third party to use a specific
somatostatin analog for PT-5. There can be no assurance that the Company will be
able to enter into a collaborative arrangement on acceptable terms, if at all.
If the Company cannot conclude such arrangement, the Company will either abandon
PT-5 development or seek to develop a substitute using MIDAS technology. There
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can be no assurance that the Company will be able to enter into an arrangement
with another party on acceptable terms if at all, or will be able to develop a
substitute using MIDAS technology in a reasonable period of time, or at all.
There can be no assurance that the Company's PT-5 development program will be
successful, that PT-5 will exhibit the expected biological results in humans,
that PT-5 will prove to be safe and efficacious in clinical trials, that the
Company will obtain the required regulatory approvals for PT-5, or that the
Company or its collaborators will be successful in obtaining market acceptance
of PT-5. The Company or its collaborators may encounter problems and delays
relating to research and development, regulatory approval, manufacturing and
marketing of PT-5.
In addition, PT-5 requires a source of radioactive rhenium, preferably
rhenium-188. This isotope can be produced by a variety of methods, including a
generator system; however, clinical grade radioactive rhenium is not currently
available in the United States. The Company is aware of an experimental
generator system developed in the United States by Oak Ridge National
Laboratory, and an additional experimental generator system available in Europe.
The Company does not intend to seek to commercialize any source of radioactive
rhenium, but is aware of other companies seeking to commercialize radioactive
rhenium. There can be no assurance that, regardless of the status of product
development by the Company, any acceptable form of radioactive rhenium will ever
be commercially available in the United States or other countries at acceptable
prices, if at all, in which event the Company may never be able to develop or
commercialize PT-5. See "Business."
GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL. Research,
development, testing, clinical trials, manufacture, distribution, advertising
and marketing, including distribution and sale, of pharmaceutical products are
subject to extensive regulation by governmental authorities in the United States
and other countries. Prior to marketing, proposed products developed by the
Company must undergo an extensive regulatory approval process required by the
FDA and by comparable agencies in other countries. This process, which includes
preclinical studies and clinical trials of each proposed product to establish
safety and effectiveness and confirmation by the FDA that good laboratory,
clinical and manufacturing practices were maintained during testing and
manufacturing, can take many years, requires the expenditure of substantial
resources and gives larger companies with greater financial resources a
competitive advantage over the Company. To date, no proposed product being
evaluated by the Company has been submitted for approval or approved by the FDA
or any other regulatory authority for marketing, and there can be no assurance
that any such product will ever be submitted or approved for marketing or that
the Company will be able to obtain the labeling claims desired for its products.
The Company is and will continue to be dependent upon the laboratories and
medical institutions conducting its preclinical studies and clinical trials to
maintain both good laboratory and good clinical practices. Data obtained from
preclinical studies and clinical trials are subject to varying interpretations
which could delay, limit or prevent FDA regulatory approval. Delays or
rejections may be encountered based upon changes in FDA policy for drug approval
during the period of development and FDA regulatory review. Similar delays also
may be encountered in foreign countries.
There can be no assurance that FDA or other regulatory approval for any
products developed by the Company will be granted on a timely basis, if at all.
Delay in obtaining or failure to obtain such regulatory approvals will
materially adversely affect the introduction and marketing of any products which
may be developed by the Company as well as the Company's results of operations.
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When and if approvals are granted, the Company, the approved drug, the
manufacture of such drug and the facilities in which such drug is manufactured
are subject to ongoing regulatory review. Subsequent discovery of previously
unknown problems may result in restriction on a product's use or withdrawal of
the product from the market. Adverse government regulation that might arise from
future legislative or administrative action, particularly as it relates to
health care reform and product pricing, cannot be predicted. See "Business."
NO COMMERCIAL MANUFACTURING CAPABILITY OR EXPERIENCE. To be successful,
the Company's products must be manufactured in commercial quantities under GMP
requirements prescribed by the FDA and at acceptable costs. The Company has not
yet manufactured any pharmaceutical products in commercial quantities and
currently does not have the facilities to manufacture any products in commercial
quantities under GMP. In the event the Company determines to establish a
manufacturing facility, it will require substantial additional funds, the hiring
and retention of significant additional personnel and compliance with extensive
regulations applicable to such a facility. The Company has no experience in
commercial pharmaceutical manufacturing, and there can be no assurance that the
Company will be able to establish such a facility successfully and, if
established, that it will be able to manufacture products in commercial
quantities for sale at competitive prices. If the Company determines to rely on
collaborators, licensees or contract manufacturers for the commercial
manufacture of its products, the Company will be dependent on such corporate
partners or other entities for, and will have only limited control over, the
commercial manufacturing of its products. While the Company has entered into
manufacturing arrangements as to certain portions of the manufacture of LeuTech,
there can be no assurance that the contract manufacturer will perform as agreed
or will remain in the contract manufacturing business for the time required by
the Company, or that the Company will be able to enter into such manufacturing
arrangements as to remaining portions of the manufacture of LeuTech. There can
be no assurance that the Company will be able to enter into any such
manufacturing arrangements as to its other proposed products on acceptable
terms, if at all. See "Business."
LIMITED CLINICAL TRIAL EXPERIENCE. Before obtaining required regulatory
approvals for the commercial sale of its proposed products, the Company must
demonstrate through clinical trials that such products are safe and efficacious
for use. The Company is in various stages of testing, but has not yet filed any
IND applications. The initiation and completion of clinical trials is dependent
upon many factors, including FDA acquiescence, the availability of qualified
clinical investigators and access to suitable patient populations. Delays in
initiating and completing clinical trials may result in increased trial costs
and delays in FDA submissions, which could have a material adverse effect on the
Company. To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties to design and
conduct any required clinical trials or expend resources to hire additional
personnel to administer such clinical trials. There can be no assurance that the
Company will be able to find appropriate third parties to design and conduct
clinical trials or that it will have the resources to hire personnel to
administer clinical trials in-house.
A number of companies in the biotechnology and pharmaceutical industries
have suffered significant setbacks in clinical trials, even after showing
promising results in earlier studies or trials. There can be no assurance that
the Company will not encounter problems in its clinical trials that will cause
the Company to delay or suspend its clinical trials, that the clinical trials of
its proposed
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products will be completed at all, that such testing will ultimately demonstrate
the safety or efficacy of such proposed products or that any proposed products
will receive regulatory approval on a timely basis, if at all. If any such
problems occur, there would be a material adverse effect on the Company.
See "Business."
LIMITED MARKETING, DISTRIBUTION OR SALES CAPABILITY AND EXPERIENCE. The
Company has limited experience in marketing pharmaceutical products, including
distribution and selling of pharmaceutical products, and will have to develop a
sales force and/or rely on collaborators or licensees or on arrangements with
others to provide for the marketing, distribution, and sales of its proposed
products. There can be no assurance that the Company will be able to establish
marketing, distribution and sales capabilities or make arrangements with third
parties to perform such activities on acceptable terms, which may result in the
lack of control by the Company over the marketing, distribution and sales of its
proposed products. In addition, there can be no assurance that the Company or
any third party will be successful in marketing, distributing or selling any
products. Furthermore, the Company will compete with many other companies that
currently have extensive and well-funded marketing, distribution and sales
operations. See "Business."
COMPETITION. The biopharmaceutical and radiopharmaceutical industries are
highly competitive. In the biopharmaceutical industry, there are a number of
companies developing peptide-based drugs, including companies exploring a number
of different approaches to making conformationally-constrained short peptides
for use as therapeutic drugs. In the radiopharmaceutical industry, there are
several companies devoted to development and commercialization of monoclonal
antibody-based products and peptide-based products. The Company is likely to
encounter significant competition with respect to its proposed products
currently under development. Many of the Company's competitors which are engaged
in the biopharmaceutical field, and in particular the development of
peptide-based products, have substantially greater financial and technological
resources and marketing capabilities than the Company, and have significantly
greater experience in research and development. Many of the Company's
competitors which are engaged in the radiopharmaceutical field, and in
particular the development of antibody- and peptide-based products, have greater
financial and technological resources and marketing capabilities than the
Company, and have significantly greater experience in research and development.
Accordingly, the Company's competitors may succeed in developing products and
underlying technologies more rapidly than the Company, and in developing
products that are more effective and useful and are less costly than any that
may be developed by the Company, and may also be more successful than the
Company in manufacturing and marketing such products. Academic institutions,
hospitals, governmental agencies and other public and private research
organizations are also conducting research and seeking patent protection and may
develop competing products or technologies on their own or through collaborative
arrangements.
The Company is aware of at least one company developing an antibody-based
product which may compete with LeuTech as to certain indications, which product
is marketed in certain European countries and for which regulatory approval is
pending in the United States. The Company is also aware of another company
developing a peptide-based product which may also compete with LeuTech as to
certain indications. The Company is aware of a number of companies developing
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technologies relating to the use of peptides as drugs, including a variety of
different approaches to making conformationally-constrained short peptides. See
"Business."
The Company is pursuing areas of product development in which there is the
potential for extensive technological innovation in relatively short periods of
time. Rapid technological change or developments by others may result in the
Company's proposed products becoming obsolete or noncompetitive.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT. Successful sales of the Company's
proposed products in the United States and other countries will depend on the
availability of adequate reimbursement from third-party payors such as
governmental entities, managed care organizations and private insurance plans.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that use of a product is safe and
efficacious, neither experimental nor investigational, medically necessary,
appropriate for the specific patient and cost effective. Since reimbursement
approval is required from each payor individually, seeking such approvals is a
time-consuming and costly process. Third-party payors routinely limit
reimbursement coverage and in many instances are exerting significant pressure
on medical suppliers to lower their prices. There is significant uncertainty
concerning third-party reimbursement for the use of any pharmaceutical product
incorporating new technology, and there is no assurance that third-party
reimbursement will be available for the Company's proposed products, or that
such reimbursement, if obtained, will be adequate. Less than full reimbursement
by governmental and other third-party payors for the Company's products would
adversely affect the market acceptance of these products and would also have a
material adverse effect on the Company. Further, health care reimbursement
systems vary from country to country, and there can be no assurance that
third-party reimbursement will be made available for the Company's proposed
products under any other reimbursement system.
See "Business."
HEALTH CARE REFORM. The health care industry is undergoing fundamental
change in the United States as a result of economic, political and regulatory
influences. There exists a powerful trend toward managed care that is motivated
by a desire to reduce costs and prices of health care. The Company anticipates
that the health care industry, particularly insurance companies and other
third-party payors, will continue to promote cost containment measures and
alternative health care delivery systems, and political debate of these issues
will most likely continue. The Company cannot predict which specific reforms
will be proposed or adopted by industry or government or the precise effect that
such proposals or adoption may have on the Company. There can be no assurance
that health care reform initiatives will not have a material adverse effect on
the Company.
CONDUCTING BUSINESS ABROAD. To the extent the Company conducts business
outside the United States, it may do so through licenses, joint ventures or
other contractual arrangements for the development, manufacturing and marketing
of its proposed products. No assurance can be given that the Company will be
able to establish suitable arrangements, that the necessary foreign regulatory
approvals for its proposed product will be obtained, that foreign patent
coverage will be available or that the development and marketing of its proposed
products through such licenses, joint ventures or other contractual arrangements
will be successful. The Company might also have greater difficulty obtaining
proprietary protection for its proposed products and technologies outside the
United States
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and enforcing its rights in foreign courts. Furthermore, international
operations and sales may be limited or disrupted by the imposition of
governmental controls regulation of medical products, export license
requirements, political instability, trade restrictions, changes in tariffs,
exchange rate fluctuations and difficulties in managing international
operations.
RISK OF LIABILITY; ADEQUACY OF INSURANCE COVERAGE; RISK OF PRODUCT RECALL.
The Company's business may be affected by potential product liability risks
which are inherent in the testing, manufacturing and marketing of proposed
pharmaceutical products to be developed by the Company. There can be no
assurance that product liability claims will not be asserted against the
Company, its collaborators or licensees. The use of proposed products developed
by the Company in clinical trials and the subsequent sale of such proposed
products is likely to cause the Company to bear all or a portion of those risks.
Such litigation claims could have a material adverse effect on the Company. The
Company has liability insurance providing up to $1,000,000 coverage per
occurrence and in the aggregate as to certain clinical trial risks, and will
seek to obtain additional product liability insurance before the
commercialization of its products. There can be no assurance, however, that
insurance will be available to the Company on acceptable terms, if at all, or
that such coverage once obtained would be adequate to protect the Company
against future claims or that a medical malpractice or other claim would not
materially and adversely affect the Company. Furthermore, there can be no
assurance that any collaborators or licensees of the Company will agree to
indemnify the Company, be sufficiently insured or have a net worth sufficient to
satisfy any such product liability claims. In addition, products such as those
proposed to be sold by the Company may be subject to recall for unforeseen
reasons. Such a recall could have a material adverse effect on the Company.
See "Business."
DEPENDENCE ON KEY MANAGEMENT AND QUALIFIED PERSONNEL; LIMITED PERSONNEL;
DEPENDENCE ON CONTRACTORS. The Company is highly dependent upon the efforts of
its management. The loss of the services of one or more members of management
could impede the achievement of development objectives. Due to the specialized
scientific nature of the Company's business, the Company is also highly
dependent upon its ability to attract and retain qualified scientific and
technical personnel. There is intense competition for qualified personnel in the
areas of the Company's activities and there can be no assurance that the Company
can presently, or will be able to continue to, attract and retain the qualified
personnel necessary for the development of its existing business and its
expansion into areas and activities requiring additional expertise. In addition,
the Company's intended or possible growth and expansion into areas requiring
additional skill and expertise, such as marketing, including sales and
distribution, will require the addition of new management personnel and the
development of additional expertise by existing management personnel. The loss
of, or failure to recruit, scientific, technical and marketing and managerial
personnel could have a material adverse effect on the Company. See "Management"
and "Business."
The Company relies, in substantial part, and for the foreseeable future
will rely, on certain independent organizations, advisors and consultants to
provide certain services, including substantially all aspects of manufacturing,
regulatory approval and clinical management. There can be no assurance that the
services of independent organizations, advisors and consultants will continue to
be available to the Company on a timely basis when needed, or that the Company
could find qualified replacements. The Company's advisors and consultants
generally sign agreements that
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provide for confidentiality of the Company's proprietary information. However,
there can be no assurance that the Company will be able to maintain the
confidentiality of the Company's technology, the dissemination of which could
have a material adverse effect on the Company.
HAZARDOUS MATERIALS; COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. The
Company's research and development involves the controlled use of hazardous
materials, chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops manufacturing capacity. In
addition, there can be no assurance that current or future environmental laws,
rules, regulations or policies will not have a material adverse effect on the
Company.
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT ON ABILITY TO RAISE CAPITAL. Of
the 12,164,444 shares of Common Stock outstanding, 11,282,691 are freely
tradable, and are not subject to any restrictions, either under securities laws
or under lock-up or other agreements. Additional Common Stock, including shares
issuable upon exercise of options and the outstanding warrants, may become
eligible for sale in the public market from time to time in the future.
Currently, warrants to purchase 2,775,409 shares of Common Stock or securities
convertible into Common Stock, at prices ranging from $.05 to $70.50 per share,
with an average weighted price of $1.70 per share, are outstanding, and options
to purchase 3,352,505 shares of Common Stock, at prices ranging from $.05 to
$90.00 per share, with an average weighted price of $2.00 per share, are
outstanding. The total number of the Offered Shares is 14,266,197 shares.
Furthermore, the Company may file one or more registration statements on Form
S-8 to register shares of Common Stock available for issuance under the
Company's 1996 Stock Option Plan, and certain other option grants and options
assumed by the Company in the Merger. Many of the foregoing options and warrants
are likely to be exercised at a time when the Company might be able to obtain
additional equity capital on more favorable terms. While those options and
warrants are outstanding, they may adversely affect the terms on which the
Company could obtain capital. The Company cannot predict the effect, if any,
that market sales of Common Stock, the exercise of options or warrants, or the
availability of such Common Stock for sale will have on the market price
prevailing from time to time. Furthermore, certain holders of the Company's
securities have the right to cause the Company to register their Common Stock
under the Securities Act in the future, which could cause the Company to incur
substantial expense, could affect the Company's ability to raise capital and
also materially and adversely affect the prevailing market price of the
Company's Common Stock.
ANTI-TAKEOVER CONSIDERATIONS. The Company's Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), authorize the
issuance of up to 2,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"), of which 264,000 are authorized for issuance as shares of
Series A Convertible Preferred Stock. The Company is seeking stockholder
approval to increase the authorized number of shares of preferred stock to
10,000,000 shares. See "Description of Securities." The Company's Board of
Directors has the authority, without action by the Company's stockholders, to
issue shares of preferred stock, and to fix the rights and preferences
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of such preferred stock, except as limited in the Certificate of Designation
relating to the Series A Convertible Preferred Stock. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue a new series of
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
Common Stock. Such authority, together with certain provisions of Delaware law
and of the Company's Certificate of Incorporation and bylaws, may have the
effect of delaying, deterring or preventing a change in control of the Company,
may discourage bids for the Company's Common Stock at a premium over the market
price and may adversely affect the market price, and the voting and other rights
of the holders, of the Common Stock. Although the Company has no present
intention to issue any additional shares of its preferred stock, other than
those already authorized for issuance upon exercise of the Preferred Stock
Placement Warrants, there can be no assurance that the Company will not do so in
the future.
NO DIVIDENDS. The Company has not paid cash dividends on its Common Stock
since its inception and does not intend to pay any dividends on its Common Stock
in the foreseeable future. The Series A Convertible Preferred Stock has a
dividend preference. See "Market for Common Stock and Related Stockholder
Matters" and "Description of Securities."
EQUITY DILUTION. Purchasers of the Offered Shares will experience
immediate and substantial dilution of their investment with respect to the net
tangible book value per share of Common Stock.
POTENTIAL CONVERSION PRICE RESET OF SERIES A CONVERTIBLE PREFERRED STOCK.
In 1997, the Company consummated an offering of units consisting of shares of
Series A Convertible Preferred Stock. The 137,780 shares of Series A Convertible
Preferred Stock sold in the offering, and the 13,778 shares issuable upon
exercise of the Preferred Stock Placement Warrants, are convertible, at the
option of the holders, into shares of Common Stock, at a conversion price of
$1.24 and stated value of $100 per share of Series A Convertible Preferred
Stock. The conversion price is subject to a reset upon the happening of certain
events. Any reset of the conversion price applicable to the Series A Convertible
Preferred Stock would result in the issuance of additional shares of Common
Stock upon conversion of the Series A Convertible Preferred Stock, and would
have a dilutive effect on purchasers of the Offered Shares. The conversion price
is also subject to adjustment under certain circumstances. See "Description of
Securities."
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST.
Certain of the directors of the Company are officers or directors of the
Placement Agent or of Paramount Capital Investments, LLC ("Paramount Capital
Investments"). Paramount Capital Investments is a merchant bank specializing in
biotechnology companies. In the regular course of its business, Paramount
Capital Investments identifies, evaluates and pursues investment opportunities
in biomedical and pharmaceutical products, technologies and companies.
Generally, Delaware corporate law requires that any transactions between the
Company and any of its affiliates be on terms that, when taken as a whole, are
substantially as favorable to the Company as those then reasonably obtainable
from a person who is not an affiliate in an arms-length transaction.
Nevertheless, neither Paramount Capital Investments nor any other person is
obligated pursuant to any agreement or understanding with the Company to make
any additional products or technologies available to the Company, and there can
be no assurance, and purchasers of the Common Stock should not expect, that any
biomedical or
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pharmaceutical product or technology identified by Paramount Capital Investments
or any other person in the future will be made available to the Company. In
addition, certain of the officers, directors, consultants and advisors to the
Company may from time to time serve as officers, directors, consultants or
advisors to other biopharmaceutical or biotechnology companies. There can be no
assurance that such other companies will not in the future have interests in
conflict with those of the Company. See "Management," "Principal Stockholders"
and "Certain Transactions."
CONTROL BY OFFICERS, DIRECTORS, AND EXISTING STOCKHOLDERS. The Company's
executive officers, directors, five percent (5%) stockholders and affiliated
entities together may be deemed to own beneficially approximately 35.7% of the
outstanding shares of the Common Stock, to own beneficially approximately 18.2%
of the outstanding shares of the Series A Convertible Preferred Stock, to hold
approximately 22.9% of the voting power based on stock outstanding as of the
date of this Prospectus, and to hold options or warrants to acquire a
significant additional number of shares of Common Stock. As a result, these
stockholders, acting together, will be able to influence significantly and
control most matters requiring approval by the stockholders of the Company,
including the election of directors. Such a concentration of ownership may have
the effect of delaying or preventing a change in control of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. Such stockholders may
influence corporate actions, including influencing elections of directors and
significant corporate events.
RISKS OF LOW-PRICED STOCK; EFFECT OF "PENNY STOCK" RULES ON LIQUIDITY FOR
THE COMPANY'S SECURITIES. Rule 15g-9 under the Exchange Act imposes additional
sales practice requirements on broker-dealers which sell securities meeting the
definition of a "penny stock" to persons other than established customers and
"accredited investors" (generally, individuals with a net worth in excess of
$1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their
spouses and certain institutional entities). For transactions covered by this
Rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, such Rule affects the ability of broker-dealers to
sell the Company's securities and may affect the ability of purchasers in this
Offering to sell any of the Offered Shares acquired hereby in the secondary
market. By regulation "penny stock" is defined as any equity security that has a
market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share and is not listed on a national
securities exchange or quoted on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule relating to
the penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stock. There can
be no assurance that the Common Stock will qualify for exemption from the penny
stock restrictions in the foreseeable future. In any event, even if the Common
Stock were exempt from such restrictions, the Company would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to restrict any person from participating in a distribution of penny stock, if
the Commission
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finds that such a restriction would be in the public interest. The market
liquidity for the Common Stock is materially adversely affected by the rules on
penny stocks.
RISK OF LOSS IN LAWSUIT. The Company and one of its subsidiaries,
Interfilm Technologies, Inc., are the plaintiffs in a lawsuit against Sony
Corporation of America and certain of its affiliates and subsidiaries
(collectively, "Sony") for breach of contract and breach of duty of good faith
and fair dealing (the "IT Litigation"). In November 1996, Sony asserted two
counterclaims in the IT Litigation. The complaint and counterclaims relate
solely to the business activities of the Company prior to the Merger. The IT
Litigation is under the control of and at the expense of an unaffiliated limited
liability partnership (the "Partnership"), and is solely for the benefit of the
Company's pre-Merger stockholders as of June 21, 1996. Based upon the opinion of
the Company's counsel of record in the IT Litigation, the Company believes that
the counterclaims are without merit. However, the Company may be liable in the
event that a judgment is rendered against the Company on the counterclaims, and
the assets of the Partnership may not be sufficient to provide full
indemnification.
See "Business."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Offered
Shares.
MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Common Stock has been quoted on the Bulletin Board since October 1,
1995. Currently, the Common Stock trades under the symbol "PLTN." Before July
22, 1996, the Common Stock traded under the symbol "IFLM." The Common Stock
began trading publicly on the Nasdaq National Market(R) ("NMS") on October 28,
1993 under the symbol "IFLM." Before October 28, 1993, there was no public
market for the Common Stock. On September 30, 1995, the Common Stock was
delisted from the NMS for failure to maintain certain net tangible assets
requirements. The Company has applied to have the Common Stock quoted on the
Nasdaq SmallCap Market(sm). There can be no assurance that the Company will be
able to meet the listing requirements of the Nasdaq SmallCap Market, or if
listed, maintain the criteria for continued listing on the Nasdaq SmallCap
Market.
The following table gives the range of high and low bid information on the
Bulletin Board for the Common Stock for each quarter since the Merger. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
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PERIOD HIGH BID PRICE LOW BID PRICE
June 26 - June 30, 1996 (1) $ 5 $ 4
July 1 - September 30, 1996 (1) 10 1 3/4
October 1 - December 31, 1996 2 13/16 1 11/32
January 1 - March 31, 1997 2 5/16 1 19/32
April 1 - June 30, 1997 1 3/4 1 1/4
July 1 - August 11, 1997 2 3/8 1 1/2
- -------------------
(1) The prices in the table have been adjusted to give retroactive effect to
the 1-for-10 reverse split of the outstanding Common Stock which became
effective on July 19, 1996. While the Merger was effective June 26, 1996,
no RhoMed equity securities were exchanged for Common Stock until July 19,
1996, and accordingly prices on and prior to July 19, 1996 may not
accurately reflect the effect of the Merger.
HOLDERS. On August 11, 1997, the approximate number of holders of record
of Common Stock was 185 and the closing sales price of the Common Stock on the
Bulletin Board was $1 3/4 per share.
DIVIDEND POLICY. The Company has never declared or paid any cash dividends
on the Common Stock. The Company currently intends to retain earnings, if any,
for use in its business and therefore does not anticipate paying cash dividends
in the foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion. The Series A Convertible
Preferred Stock has a dividend preference.
See "Description of Securities."
TRANSFER AGENT. The transfer agent for the Common Stock is American Stock
Transfer & Trust Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997. This table should be read in conjunction with the Company's
financial statements and the related notes thereto appearing in this Prospectus
(the "Financial Statements"). See "Financial Statements."
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MARCH 31, 1997 JUNE 30, 1996
Stockholders' equity: (UNAUDITED) (AUDITED)
Preferred stock, $.01 par value; 2,000,000
shares authorized, as of March 31,
1997 and June 30, 1996; and 30,630 and
no shares issued as of March 31, 1997
and June 30, 1996,respectively $ 2,680,591 $ --
Common stock, $.01 par value; 25,000,000
shares authorized, as of March 31, 1997
and June 30, 1996; and 11,753,978 and
11,538,777 issued as of March 31, 1997
and June 30, 1996, respectively 117,540 115,388
Treasury stock, 1,229 shares of Common Stock (1,667) (1,667)
Additional paid-in capital 11,018,039 10,804,394
Common stock earned but not issued 279,278 53,030
Unamortized deferred compensation (88,221) --
Deficit accumulated during the development stage (11,658,444) (8,132,938)
Total stockholders' equity................ $ 2,347,116 $ 2,838,207
============ ===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Financial Statements and notes thereto filed as part of this Prospectus.
Prior to May 10, 1995, the Company, then named Interfilm, Inc.
("Interfilm"), had been primarily engaged in the business of exploiting the
rights related to its inactive motion pictures ("Cinematic Games"), including
the production and distribution of Cinematic Games for initial exhibition in
theaters and subsequently in enhanced versions for distribution to the home
market. On May 10, 1995, the Board of Directors of Interfilm decided to
substantially curtail the operations of Interfilm and its subsidiaries. As a
result of the Merger, which became effective on June 25, 1996, RhoMed became a
wholly-owned subsidiary of the Company, with the holders of RhoMed preferred
stock, RhoMed common stock and warrants and options to purchase RhoMed common
stock receiving an aggregate of an approximately 96% interest in the equity
securities of the Company on
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a fully-diluted basis. Since the former stockholders of RhoMed retained more
than a 50% controlling interest in the Company, the Merger was treated as a
reverse acquisition for accounting purposes. The historical financial statements
of the Company presented prior to the Merger are those of RhoMed and the
business of RhoMed represents the on-going business of the Company.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED MARCH 31, 1997 COMPARED TO THREE AND
NINE MONTH PERIODS ENDED MARCH 31, 1996. During the three month period ended
March 31, 1997, the Company discontinued the manufacture and sale of RhoChek,
the sole product sold by the Company, due to insufficient sales. There were no
revenues from the sale of products in the three month period ended March 31,
1997, compared to $12,240 in the three month period ended March 31, 1996.
Revenues in the nine month period ended March 31, 1997 were $22,184 compared to
$20,971 in the nine month period ended March 31, 1996. The Company received no
additional revenues from the sale of products in the fiscal year ended June 30,
1997.
In December 1996, the Company entered into an Option Agreement with Nihon,
pursuant to which the Company received, in January 1997, an initial payment of
$900,000 net of Japanese withholding taxes of $100,000 (the "Initial Payment").
The Company has accounted for the Initial Payment in the period ended March 31,
1997 by recognizing license fee revenue of $350,000 and deferred license fee
revenue of $550,000. The deferred license fee revenue will be recognized if a
license agreement is consummated with Nihon or eliminated if the Company is
required to repay certain monies to Nihon under the Option Agreement. There were
no revenues from license fees or royalties in the three and nine month periods
ended March 31, 1996.
During the three month period ended March 31, 1997, the Company had four
Phase I grants under the Small Business Innovative Research ("SBIR") program
active with the National Institutes of Health of the Department of Health and
Human Services ("NIH"). Grant revenue from these grants was $267,862 in the
three month period ended March 31, 1997, compared to no revenues from grants in
the three month period ended March 31, 1996. Grant revenue in the nine month
period ended March 31, 1997 was $267,862, compared to no revenues from grants in
the nine month period ended March 31, 1996. The Company has approximately
$100,000 in additional grant revenue which can be drawn under the four Phase I
grants.
Research and development expenses increased to $1,050,400 for the three
month period ended March 31, 1997 from $242,212 for the three month period ended
March 31, 1996, with expenses of $2,300,669 for the nine month period ended
March 31, 1997 compared to $557,955 for the nine month period ended March 31,
1996. The increase in expenses for both the current three and nine month periods
is attributable to expansion in the scale of the Company's research and
development operations, which expanded following completion of an offering of
RhoMed Common Stock in June 1996. The Company substantially increased research
and development spending, primarily relating to development of LeuTech for
diagnostic imaging of infections, including increased expenses for manufacturing
scale-up, consulting and clinical trials, and also relating to research expenses
on the Company's MIDAS technology. The Company expects research and development
expenses to continue to increase in future quarters as the Company expands
manufacturing efforts and initiates clinical trials on LeuTech and significantly
expands its efforts to develop MIDAS
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technology including the hiring of scientists and the acquisition of equipment
and supplies in conjunction with completion of the new research and development
facility in Edison, New Jersey.
Pursuant to agreement with Aberlyn Holding Co., Inc. and its affiliates
(collectively "Aberlyn"), effective April 30, 1997, the Company issued 255,641
shares of Common Stock, valued at the rate of 75% of the average per share
closing price for the twenty trading days immediately proceeding April 30, 1997,
in payment of accrued interest from June 1, 1996 through April 30, 1997 of
$303,171. The 25% discount to market value of Common Stock represented
additional interest payable. However, management believes the additional
interest will not have a material adverse effect on the financial position or
operations of the Company.
General and administrative expenses increased to $793,370 for the three
month period ended March 31, 1997 from $405,111 for the three month period ended
March 31, 1996, and increased to $1,740,125 for the nine month period ended
March 31, 1997 from $1,017,061 for the nine month period ended March 31, 1996.
The increase is attributable primarily to the hiring of certain key executives,
the leasing of executive offices in New Jersey, and increased travel and
consulting expenses. General and administrative expenses were also affected by
the amortization of the value of options and warrants issued to consultants.
General and administrative expenses are expected to remain approximately at
current levels through the remainder of fiscal year 1997.
Interest income was $36,330 and $159,023 for the three and nine month
periods ended March 31, 1997, compared with no interest income for the three and
nine month periods ended March 31, 1996. The interest income is primarily the
result of interest on net proceeds from a Common Stock offering of approximately
$8,400,000 completed in June 1996. Interest income is expected to increase in
coming quarters as a result of increased cash balances from the proceeds of the
offering of the Company's Series A Convertible Preferred Stock (the "Series A
Offering").
Interest expenses decreased to $84,927 for the three month period ended
March 31, 1997 compared with $143,465 for the three month period ended March 31,
1996, and decreased to $301,200 from $348,121 for the nine month periods ended
March 31, 1997 and 1996 respectively. Interest expense for the nine months
ending March 31, 1997, is comprised of (i) interest on long-term financing
provided by Aberlyn, the principal and accrued interest of which totaled
$1,905,477, (ii) interest on notes payable to stockholders, the principal amount
of which is $80,000, and (iii) interest on Senior Bridge Notes which were repaid
in full in the quarter ended September 30, 1996. As a result of repayment by the
Company of the Senior Bridge Notes, the principal amount of which was
$1,000,000, interest expense is expected to remain at current levels for the
balance of the fiscal year ended June 30, 1997, and substantially below the
levels for the prior fiscal year.
Net loss increased to $1,257,086 for the three month period ended March
31, 1997 compared with $914,009 for the three month period ended March 31, 1996,
and increased to $3,525,506 for the nine month period ended March 31, 1997
compared to $2,161,427 for the nine month period ended March 31, 1996. The net
loss per share decreased in both the three and nine month period ended March 31,
1997 compared to the prior year, a result related to the substantial increase in
the weighted average shares outstanding. There were 11,745,837 shares of Common
Stock outstanding in the three month period ended March 31, 1997 compared to
1,294,792 shares outstanding in the three month period ended March 31, 1996, and
11,618,271 shares outstanding in the nine month
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<PAGE>
period ended March 31, 1997 compared to 1,290,451 shares outstanding in the nine
month period ended March 31, 1996. The increase in the shares outstanding is
primarily the result of issuance of 7,664,844 shares of Common Stock in
connection with the sale of Common Stock completed in June 1996.
TEN MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO TEN MONTH PERIOD ENDED
JUNE 30, 1995. License fees and royalties were zero for the ten months ended
June 30, 1996, compared to $64,296 for the prior ten month period. The decrease
in license fees and royalties is primarily attributable to the timing of when
these fees are earned; during the ten months ended June 30, 1996, there were no
royalties on product sales or new license agreements. Sales of RhoChek, the sole
product sold by the Company, decreased $6,090 to $24,457 in the ten months ended
June 30, 1996, from $30,546 in the prior ten month period.
Research and development expenses increased by $391,983 to $869,896 for
the ten months ended June 30, 1996, from $477,913 in the ten months ended June
30, 1995. The majority of the increase is attributable to LeuTech, including
increased consulting, clinical trial and manufacturing scale-up expenses.
General and administrative expenses increased to $1,250,343 in the ten
months ended June 30, 1996, from $598,560 for the ten months ended June 30,
1995. The majority of the increase is due to the hiring of a Chairman of the
Board and Chief Executive Officer; Vice President of Finance and Chief Financial
Officer; the leasing of general and administrative offices in New Jersey; and
increased travel and consulting expenses.
Other expenses increased to $1,802,097 for the ten months ended June 30,
1996 from $305,615 for the ten months ended June 30, 1995. The increase is
attributable primarily to increased interest expense, commission and fees paid
in connection with the Company's debt offerings ($168,970), costs and fees
associated with the Merger ($525,000), costs and expenses associated with the
relocation of the Company's research and general and administrative offices
($284,000), including primarily severance costs, facility closing expenses and
recruiting fees, and the write down of certain patents not currently used in
development projects ($259,334).
Net loss increased to $3,897,879 in the ten months ended June 30, 1996,
compared to $1,287,246 in the prior ten month period.
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1994. Total revenues decreased by $49,946 to $97,902 for the fiscal year ended
August 31, 1995, from $147,848 in the previous fiscal year. The decrease is
attributable to no grant revenue during fiscal year 1995 compared to $50,289 for
the previous fiscal year.
Research and development expenses were $619,354 for the fiscal year ended
August 31, 1995 compared to $584,941 for the previous fiscal year.
General and administrative expenses decreased to $776,291 for the fiscal
year ended August 31, 1995 from $939,155 in the previous fiscal year. Such
decrease was primarily attributable to decreased offering expenses.
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<PAGE>
Other expenses increased to $341,121 for the fiscal year ended August 31,
1995 from $168,707 in the previous fiscal year. The increase is attributable to
higher interest expense due to a higher average debt balance outstanding
throughout the 1995 fiscal year.
Net loss for the fiscal year ended August 31, 1995 increased to $1,638,864
from $1,544,955 in the previous fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has incurred net operating losses and, as
of March 31, 1997, had an accumulated deficit of $11,658,444. The Company has
financed its net operating losses through March 31, 1997 by a series of debt and
equity financings.
At March 31, 1997, the Company had cash and cash equivalents of
$4,863,237. The cash is cash equivalents which are composed of: (i) the
remaining net proceeds from the Company's offering of Common Stock in June 1996,
(ii) the receipt from Nihon of $900,000 pursuant to the Agreement, and (iii) the
net proceeds from the Company's Series A Offering of $2,680,591 as of March 31,
1997.
For the nine months ended March 31, 1997, the net decrease in cash
amounted to $1,928,063. Cash used for operating activities was $3,358,021, net
cash used for investing activities was $128,293, and cash provided by financing
activities was $1,558,251, primarily from the proceeds from the Series A
Offering less repayment of the Senior Bridge Notes.
On December 2, 1996, the Company commenced the Series A Offering at a
price of $100,000 per unit, with each unit consisting of 1,000 shares of Series
A Convertible Preferred Stock. As of March 31, 1997, the Company had sold 30.63
units, representing 30,630 shares of Series A Convertible Preferred Stock, for
net proceeds to the Company of $2,680,591, after deducting commission and other
expenses of the Series A Offering. The final closing on the Series A Offering
was effective as of May 9, 1997, with the Company having sold an aggregate total
of 137.78 units, representing 137,780 shares of Series A Convertible Preferred
Stock, for net proceeds to the Company of approximately $11,800,000, after
deducting commission and other expenses of the Series A Offering.
Pursuant to the Option Agreement, Nihon can maintain its option to license
certain products based on the MIDAS technology provided Nihon makes certain
milestone payments based on progress in product development. Nihon may exercise
its right to negotiate a license agreement at any time upon notice and payment
of additional monies to the Company. In the event that the parties cannot agree
on terms of a license agreement, then the Company will be required to repay up
to $550,000 to Nihon. There can be no assurance that the Company and Nihon will
ever enter into a definitive license agreement, that additional payments
provided for in the Option Agreement will be made, or that the strategic
alliance between the Company and Nihon will result in the development or
commercialization of any product.
Pursuant to the terms of the notes payable to stockholders ("Notes"),
repayment of principal and interest is required 75 days after the completion of
a fiscal year when the Company has net assets of at least $5,000,000.
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In March 1997, the Company entered into a ten-year lease on research and
development facilities in Edison, New Jersey, with the lease term commencing
August 1, 1997. Minimum future lease payments escalate from approximately
$116,000 per year to $200,000 per year after the fifth year of the lease term.
The lease will expire in fiscal year 2007. The Company anticipates that the cost
of tenant improvements, net of the landlord's contribution, and acquisition of
laboratory equipment may exceed $1,500,000.
Effective August 1, 1997, the Company entered into a five-year lease on
administrative offices in Princeton, New Jersey. Minimum future lease payments
are approximately $97,000 per year.
Commencing May 1997, the Company's monthly payments on long-term financing
provided by Aberlyn increased to $91,695, representing payment of current
interest and principal. The final monthly payment is scheduled to be made in
April 1999.
Under certain license agreements relating to LeuTech, the Company is
obligated to make minimum payments of $100,000 per year in the fiscal years
ending June 30, 1998 and 1999, and $125,000 in the fiscal year ending June 30,
2000.
The Company's future capital requirements depend on numerous factors which
cannot be quantified, including continued progress in its research and
development activities, progress with pre-clinical studies and clinical trials,
prosecuting and enforcing patent claims, technological and market developments,
the ability of the Company to establish product development arrangements, the
cost of manufacturing scale-up, effective marketing activities and arrangements,
and licensing or acquisition activity.
The Company has been seeking and expects to continue to seek to license or
acquire certain products and technologies. If the Company is successful in
acquiring a product or technology, substantial funds may be required for such
acquisition and subsequent development or commercialization. To date, the
Company has not completed an acquisition and there can be no assurance that any
acquisition will be consummated in the future.
The Company believes that the net proceeds from the Series A Offering of
$11,800,000 as of May 9, 1997 and the Initial Payment received under the Option
Agreement, together with its other cash, is sufficient to fund the Company's
projected debt obligations and fund projected operations through fiscal year
1998.
The Company anticipates incurring additional losses over at least the next
several years, and such losses are expected to increase as the Company expands
its research and development activities relating to its MIDAS technology and its
direct radiolabeling technology. To achieve profitability, the Company, alone or
with others, must successfully develop its technologies and proposed products,
conduct pre-clinical studies and clinical trials, obtain required regulatory
approvals and successfully manufacture and market such technologies and proposed
products. The time required to reach profitability is highly uncertain, and
there can be no assurance that the Company will be able to achieve profitability
on a sustained basis, if at all.
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BUSINESS
GENERAL
The Company and its wholly-owned subsidiary, RhoMed, is a
development-stage biopharma ceutical company dedicated to developing and
commercializing products and technologies for diagnostic imaging, cancer therapy
and ethical drug development utilizing peptide, monoclonal antibody and
radiopharmaceutical technologies. The Company concentrates its activities in two
technology areas, each of which the Company believes may be used to develop
products with potential diagnostic and therapeutic applications. These
technologies involve the Company's (i) patent-pending MIDAS technology and (ii)
patented and patent-pending direct radiolabeling technology.
The Company believes that the MIDAS technology represents a platform
technology which may enable the design and synthesis of novel peptide analogs or
mimics. Further, the Company believes that its MIDAS technology may provide the
Company with the flexibility to generate its own pharmaceutical products, and
the ability to target and complement existing product portfolios and
technological bases of other companies. The Company intends to seek to enter
into collaborative arrangements to assist in development, manufacturing and
marketing of certain proposed products utilizing the MIDAS technology. The
Company has entered into a license option agreement as to certain proposed
products based on MIDAS technology. See "MIDAS Technology."
The Company is developing two proposed products incorporating its direct
radiolabeling technology, (i) LeuTech, an infection and inflammation imaging
product, and (ii) PT-5, a radiotherapeutic peptide somatostatin analog for
cancer therapy. The Company is devoting substantial efforts and resources to the
development of LeuTech, which the Company believes will be its first proposed
product to enter Company-sponsored clinical trials. The Company anticipates
seeking one or more marketing partners for LeuTech prior to product approval.
See "Direct Radiolabeling Technology."
The Company is at an early stage of development and has not yet completed
the development of any products based on either its MIDAS technology or its
direct radiolabeling technology. Accordingly, the Company has not begun to
market or generate revenues from the commercialization of any such products. It
will be a number of years, if ever, before the Company will recognize
significant revenues from product sales or royalties. The Company's technologies
and products under development will require significant time-consuming and
costly research, development, preclinical studies, clinical testing, regulatory
approval and significant additional investment prior to their commercialization,
which may never occur. There can be no assurance that the Company's research and
development programs will be successful, that its products will exhibit the
expected biological results in humans, that its products will prove to be safe
and efficacious, that its products will obtain the required regulatory
approvals, demonstrate substantial therapeutic or diagnostic benefit, be
commercialized on a timely basis, experience no design or manufacturing
problems, be manufactured on a large scale, or be economical to market, or that
the Company or its collaborators will be successful in obtaining market
acceptance of any of the Company's products or generate sufficient revenue to
support research and development programs. There can be no assurance that the
Company will be successful in entering into strategic alliances or collaborative
arrangements on
26
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commercially reasonable terms, if at all, that such arrangements will be
successful, or that the parties with which the Company will establish
arrangements will perform their obligations under such arrangements. The Company
or its collaborators may encounter problems and delays relating to research and
development, regulatory approval, manufacturing and marketing. The failure by
the Company to successfully address such problems and delays would have a
material adverse effect on the Company. In addition, no assurance can be given
that proprietary rights of third parties will not preclude the Company from
marketing its proposed products or that third parties will not market superior
or equivalent products.
HISTORY AND MERGER
The Company was incorporated under the laws of the State of Delaware on
November 21, 1986. From November 4, 1993, when the Company, then named
Interfilm, acquired Interfilm Technologies, Inc., a New York corporation,
through May 9, 1995, Interfilm was primarily engaged in the business of
exploiting the rights related to its interactive motion picture process,
including the production and distribution of interactive motion pictures for
initial exhibition in theaters and subsequently in enhanced versions for
distribution to the home market. Interfilm consummated an initial public
offering on October 28, 1993, and on May 10, 1995, the Board of Directors of
Interfilm decided to substantially curtail the operations of Interfilm and its
subsidiaries. Interfilm conducted no business activities from May 10, 1995 until
June 25, 1996.
MERGER WITH RHOMED. On June 25, 1996, a newly formed, wholly-owned
subsidiary of Interfilm, Interfilm Acquisition Corporation ("InSub"), a New
Mexico corporation, merged with and into RhoMed, a New Mexico corporation, and
all of RhoMed's outstanding equity securities were ultimately exchanged for
equity securities of the Company (the "Merger"). As a result of the Merger,
RhoMed became a wholly-owned subsidiary of the Company, with the holders of
RhoMed preferred stock and RhoMed common stock (including the holders of "RhoMed
Derivative Securities" as hereafter defined) receiving an aggregate of an
approximately 96% interest in the equity securities of the Company on a
fully-diluted basis. Additionally, all warrants and options to purchase common
stock of RhoMed outstanding immediately prior to the Merger (the "RhoMed
Derivative Securities"), including without limitation, any rights underlying
RhoMed's qualified and nonqualified stock option plans, were automatically
converted into rights to receive, upon exercise, Common Stock, in the same
manner in which shares of RhoMed common stock were converted. Since the former
stockholders of RhoMed acquired, by reason of the Merger, more than a 50%
controlling interest in the Company, the Merger has been treated, for accounting
purposes, as a reverse acquisition. Consequently, the historical financial
statements of the Company prior to June 25, 1996, are those of RhoMed.
In connection with the Merger, certain pre-Merger assets and liabilities
of the Company and one of its wholly-owned subsidiaries, consisting principally
of certain intellectual property and the IT Litigation claims against Sony, were
transferred to the Partnership for the benefit of the Company's pre-Merger
stockholders as of a record date of June 21, 1996. See "Legal Proceedings."
On July 19, 1996, the Company filed an amendment to its Certificate of
Incorporation (the "Charter Amendment"), which (i) effected the change of name
of the Company from Interfilm, Inc. to Palatin Technologies, Inc., (ii)
increased the total number of authorized shares of the Company's
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Common Stock from 10,000,000 to 25,000,000 and (iii) effected a 1-for-10 reverse
split of the Common Stock.
As a result of the Merger and the Charter Amendment, each share of RhoMed
preferred stock was converted into .46695404349 shares of Common Stock, and each
share of RhoMed common stock was converted into .184332593 shares of Common
Stock.
MIDAS TECHNOLOGY
ROLE AND FUNCTION OF PEPTIDES. Peptides, short chains of amino acids, play
important roles in regulating a variety of biological functions. Natural
peptides function by conforming or bending to fit specific molecules on cell
surfaces, called receptors, thereby signaling the cell to initiate a biological
activity. Some important biological functions that are affected in this manner
include overall growth and behavior, inflammatory responses, immune responses
and wound healing.
In order to effectively regulate cell signaling, a peptide must bind to
its target receptor with high affinity. The affinity of a peptide for its target
receptor is highly dependent on its three-dimensional shape or conformation.
Many naturally occurring peptides are flexible and can take on multiple
conformations, allowing them to interact with more than one type of cell
receptor, and to control multiple functions within the body. However, when such
peptides are used as drugs, this multiple reactivity is a disadvantage as it may
lead to side effects. The ability to construct high-affinity, receptor-specific
peptides offers a significant opportunity to develop potent receptor-specific
drugs.
INTRODUCTION TO MIDAS TECHNOLOGY. The Company believes that its
patent-pending MIDAS technology can be used to rationally design and produce
receptor-specific drugs. Using MIDAS, highly stable metallopeptide complexes are
formed, in which the metal ion locks or constrains the peptide into a specific
conformation. By designing MIDAS peptides to mimic the conformation required for
a specific receptor, a stable, receptor-specific drug, with high affinity and
enhanced biological activity, can be made. Radiopharmaceutical products, which
may be diagnostic or therapeutic, may be developed using radioactive metal ions
in MIDAS peptides. Non-radioactive metal ions may be used in the development of
biopharmaceutical MIDAS peptides.
The Company is engaged in research and development on a number of product
opportunities for its MIDAS technology, including use as a thrombosis imaging
agent, an infection imaging agent and an immunostimulatory agent, and believes
that MIDAS technology may have medical applications in a variety of areas,
including immune disorders, cancers and cardiology. No prediction can be made,
however, as to when or whether the areas in which there are ongoing MIDAS
technology research projects will yield scientific discoveries, or whether such
research projects will lead to commercial products
RESEARCH PROJECTS. Certain pre-clinical work on development of MIDAS-based
products has been supported, in part, by three Phase I grants for $100,000,
$93,948 and $94,970 under the SBIR program awarded to the Company by the NIH.
The Company intends to apply for Phase II SBIR grants, each in an amount of up
to $750,000, although there can be no assurance that any Phase II grant will be
awarded.
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OTHER POTENTIAL OPPORTUNITIES. The Company is evaluating a number of
product opportunities for its MIDAS technology, and believes that this
technology may have medical applications in a variety of areas, including immune
disorders, cancers and cardiology. The Company intends to expand research and
development of MIDAS technology applications primarily through strategic
alliances with other entities. No assurances can be made regarding the
establishment or the timing of such alliances, and the failure to establish such
alliances on a timely basis could limit the Company's ability to develop MIDAS
technology and could have a material adverse effect on the Company. The Company
expects to devote resources to expand research and development of MIDAS
technology to the extent funding is available.
OPTION AGREEMENT WITH NIHON. The Company entered into the Option Agreement
with Nihon, a Japanese developer and manufacturer of radiopharmaceutical drugs.
Pursuant to the Option Agreement (i) Nihon has an option to exclusively license
certain jointly developed radiopharmaceutical diagnostic products based on the
Company's MIDAS technology and (ii) Nihon can maintain its option by making
certain milestone payments based on progress in product development.Nihon may
exercise its right to negotiate a license agreement at any time upon notice and
payment of additional monies to the Company. There can be no assurance that
future payments provided for in the Option Agreement will be made, that the
Company and Nihon will ever enter into a definitive license agreement, or that a
definitive strategic alliance between the Company and Nihon will result in the
development or commercialization of any product. In the event that Nihon gives
notice of its right to negotiate a license agreement, and the parties cannot
agree on terms of such license agreement, the Company will be required to repay
certain monies to Nihon. Failure to enter into a definitive license agreement,
or being required to repay certain monies to Nihon, may have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
DIRECT RADIOLABELING TECHNOLOGY
The Company has developed and patented radiolabeling technologies for the
direct radiolabeling of antibodies, peptides and other proteins with diagnostic
and therapeutic radioisotopes.
LEUTECH DIAGNOSTIC IMAGING PRODUCT. LeuTech, a proposed product under
development that utilizes direct radiolabeling technology, is a murine (or
mouse) monoclonal antibody-based product designed to be labeled with the
diagnostic radioisotope technetium-99m. When labeled with technetium-99m,
LeuTech is intended to be used for diagnosis of infections, occult abscesses,
sites of inflammatory disease and other conditions involving high concentrations
of white blood cells.
The Company believes that LeuTech can be used for the rapid diagnosis of a
variety of difficult to diagnose infections and occult abscesses. Occult
abscesses are hidden infections that are generally characterized as being highly
localized. Examples of typical occult abscesses include infections of the
intra-abdominal area, such as intestinal, spleen, liver or urinary tract
abscesses, as well as bone, prosthetic and other abscesses. In a typical
abscess, as in most infections, large numbers of white blood cells congregate at
the site of the infection. Thus, if the location of concentrations of white
blood cells is known, the site of the infection is also known. It is crucial in
the diagnosis and treatment of occult abscesses that the location of the
infection be determined, as location will frequently determine the type of
therapy which is appropriate.
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The most specific procedure currently available for nuclear medicine
imaging of sites of infection involves removal of blood from the patient,
isolating white blood cells from the patient's blood, radiolabeling the white
blood cells and injecting the radiolabeled white blood cells back into the
patient. The radiolabeled white blood cells then localize at the site of the
infection, and can be detected using nuclear medicine diagnostic equipment. This
procedure is expensive, involves risks to patients and technicians associated
with blood handling, is difficult to perform and generally takes at least twelve
hours.
LeuTech has been formulated as a lyophilized, or freeze-dried, kit
containing the modified antibody and reagents required for the radiolabeling
process. Prior to use, LeuTech will be labeled with technetium-99m by a
radiopharmacy or by a hospital's nuclear medicine department. LeuTech is
designed to bind, in the body, to white blood cells already present at the site
of the infection or circulating in the blood stream. Therefore, LeuTech does not
require handling or processing of patient blood.
Preliminary clinical trials have been conducted under an IND application
held in the name of an investigator, using purified antibody or kits provided by
the Company. Forty patient studies have been completed at UCLA/Harbor Medical
Center in Los Angeles, with images obtained in a variety of diseases, including
acute and suspected appendicitis, pulmonary infections and other abdominal
infections. In seven cases satisfactory images were not obtained, due primarily
to labeling or product formulation failures with early kit formulations. In some
cases, diagnostic images have been obtained within five minutes of
administration of LeuTech, and in all cases in which a definitive diagnosis
could be made, diagnostic images have been obtained within 90 minutes. An
additional seventeen patient studies were completed in Germany at the University
of Gottingen, using kits manufactured by a third party to the Company's
specifications, with images obtained in osteomyelitis and soft tissue
infections.
The Company has entered into an exclusive license agreement with the
Wistar Institute to use the antibody and cell line used for LeuTech for a
defined field of use. Failure to meet the performance criteria for any reason or
any other event of default under the license agreement leading to termination of
the license agreement with Wistar Institute would have a material adverse effect
on the Company. While the Company has negotiated a long-term contractual
arrangement for the manufacture of the purified antibody necessary for LeuTech,
there can be no assurance that such contractor will be able to successfully
manufacture purified antibody for LeuTech on a sustained basis, that such
contractor will remain in the contract manufacturing business for the time
required by the Company, or that the Company will be able to enter into such
contractual arrangements as to other steps and components required to
manufacture LeuTech. To date, the Company has only manufactured LeuTech in lots
preparatory to initiating clinical trial use, and has not determined whether
commercial quantities of LeuTech in conformity with these standards can be
manufactured on a sustained basis at an acceptable cost. Such manufacture must
be done under GMP requirements prescribed by the FDA and other agencies.
The Company intends to file an IND application on LeuTech to initiate
clinical trials on one or more selected indications in the second half of 1997,
and to complete Phase III clinical trials and file regulatory applications to
market with the FDA in the second half of 1998. There can be no assurance that
the Company's LeuTech development program will be successful, that the FDA will
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permit the Company's planned clinical trials to proceed, that LeuTech will prove
to be safe and efficacious in clinical trials, that LeuTech can be manufactured
in commercially required quantities on a sustained basis at an acceptable price,
that LeuTech will obtain the required regulatory approvals or that the Company
or its collaborators will be successful in obtaining market acceptance of
LeuTech. The Company or its collaborators may encounter problems and delays
relating to research and development, regulatory approval, manufacturing and
marketing of LeuTech.
PT-5 CANCER THERAPEUTIC PRODUCT. PT-5 is a rhenium-labeled somatostatin
peptide analog being developed by the Company which is intended to treat cancers
by regional delivery of tumor cell-targeted radiotherapy. PT-5 binds to
somatostatin receptors. Somatostatin, a natural peptide hormone involved in the
regulation of cell growth and differentiation, is over-expressed on a wide
variety of cancers. PT-5 is intended to target such cancers and deliver a
therapeutic dose of rhenium- 188, a radioisotope which emits high energy beta
radiation, to the cancer.
The Company has developed a reproducible, easy to use, and high efficiency
direct radiolabeling method for PT-5; developed a lyophilized final product
formulation; conducted biodistribution studies of PT-5 in normal animals using
several different routes of administration, including intravenous and
intra-cavity administration; conducted biodistribution studies of PT-5 in
tumor-bearing animals; and demonstrated that PT-5 has a specific therapeutic
effect in animal models of three different human tumors -- lung, prostate and
breast cancers.
The Company believes PT-5 may have applications for local or regional
administration to any compartmentalized cancer which is somatostatin-receptor
positive. The cancer must be compartmentalized in order for local or regional
administration to work and must express somatostatin receptors in reasonably
high levels in order to obtain the targeting benefits of PT-5. Expression of
somatostatin receptors varies by type of cancer. However, until clinical trials
are completed, specific clinical utility and applications, if any, cannot be
determined.
The Company is working with researchers at the University of Bonn in
Germany to initiate clinical trials of patients with bronchial cancer metastatic
to the pleural cavity. PT-5 will be administered by infusion directly into the
pleural cavity. This trial is primarily designed to obtain safety and dose
response data, and secondarily to obtain evidence of efficacy, including tumor
stasis or regression and improvement in cancer-associated biological markers.
PT-5 requires a source of radioactive rhenium, preferably rhenium-188.
This isotope can be produced by a variety of methods, including a generator
system; however, clinical grade radioactive rhenium is not currently available
in the United States. The Company is aware of an experimental generator system
developed in the United States by Oak Ridge National Laboratory, and an
additional experimental generator system available in Europe. The Company does
not intend to seek to commercialize any source of radioactive rhenium, but is
aware of other companies seeking to commercialize radioactive rhenium. There can
be no assurance that, regardless of the status of product development by the
Company, any acceptable form of radioactive rhenium will ever be commercially
available in the United States or other countries at acceptable prices, if at
all, in which event the Company may never be able to develop or commercialize
PT-5.
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The Company is discussing entering into a collaborative arrangement with a
third party to use a specific somatostatin analog for PT-5, and both parties are
waiting to evaluate the results of preliminary clinical trials. There can be no
assurance that the Company will be able to conclude a collaborative arrangement
on acceptable terms, if at all. If the Company cannot conclude such arrangement,
the Company will either abandon PT-5 development or seek to develop a substitute
using MIDAS technology. There can be no assurance that the Company will be able
to enter into an arrangement with another party on acceptable terms if at all,
or will be able to develop a substitute using MIDAS technology in a reasonable
period of time, or at all. There can be no assurance that the Company's PT-5
development program will be successful, that PT-5 will exhibit the expected
biological results in humans, that PT-5 will prove to be safe and efficacious in
clinical trials, that the Company will obtain the required regulatory approvals
for PT-5, or that the Company or its collaborators will be successful in
obtaining market acceptance of PT-5. The Company or its collaborators may
encounter problems and delays relating to research and development, regulatory
approval, manufacturing and marketing of PT-5.
RHOCHEK PRODUCT
The Company had manufactured and marketed, under the trade name RhoChek, a
quality control test product for measuring the immunoreactive fraction of
radiolabeled antibodies specific to certain cancer antigens. Due to insufficient
sales, the Company discontinued product sales of RhoChek in the fiscal year
ended June 30, 1997.
MARKETS FOR PRODUCTS
The Company's proposed products and technologies are intended to be
utilized in two distinct pharmaceutical markets. One market, intended to be
addressed by LeuTech, PT-5 and certain proposed products resulting from the
Company's MIDAS technology, is the radiopharmaceutical market. The other market,
intended to be addressed by other proposed products resulting from MIDAS
technology, is the larger biopharmaceutical market.
The radiopharmaceutical market involves both diagnostic imaging and
therapeutic applications. For imaging, trace amounts of a radioisotope bound to
a radiopharmaceutical drug are injected into a patient and detected with nuclear
medicine diagnostic equipment, generally a gamma camera. For therapy,
radioisotopes which emit radiation lethal to cancer cells are employed.
The Company believes that proposed products resulting from its MIDAS
technology can be used for a variety of biopharmaceutical applications where
non-radioactive but receptor-specific drugs are desired. The Company believes
the MIDAS technology may be applicable to a number of disease states, including
immune disorders, cancer, and cardiac therapy. There are a limited number of
receptor-specific, peptide-based drugs commercially available, but none which
employ a metallopeptide. There can be no assurance that MIDAS technology will
result in the development of any such drugs.
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RESEARCH AND DEVELOPMENT EXPENDITURES
In the nine months ended March 31, 1997, the ten months ended June 30,
1996 and the fiscal year ended August 31, 1995, the Company spent $2,300,669,
$869,896 and $619,354, respectively, on research and development activities.
GRANTS AND COLLABORATIVE RESEARCH
The Company applies for grants with the NIH and other federally-funded
agencies ("Research Grants") to develop its products and technologies. Since
inception, the Company has been awarded over $2.4 million in peer-reviewed
Research Grants. During the fiscal year ended June 30, 1997, the Company had
four active Phase I SBIR Research Grants. Generally, the maximum amount of a
Phase I SBIR Research Grant is $100,000, and the maximum amount of a Phase II
SBIR Research Grant is $750,000. There can be no assurance that any additional
Research Grants will be awarded.
The Company has, where scientifically or technologically merited, actively
solicited Cooperative Research and Development Agreements ("CRADA") with
agencies of the federal government, involving collaborative development
activities with the Company. The Company currently has no active CRADAs, but has
completed CRADAs with Los Alamos National Laboratory, Brookhaven National
Laboratory, Oak Ridge National Laboratory and Sandia National Laboratory,
relating primarily to radiopharmaceutical drug development, including PT-5, and
animal studies of proposed radiopharmaceutical products.
COMPETITION
The biopharmaceutical and radiopharmaceutical industries are highly
competitive. In the biopharmaceutical industry, there are a number of companies
developing peptide-based drugs, including companies exploring a number of
different approaches to making conformationally-constrained short peptides for
use as therapeutic drugs. In the radiopharmaceutical industry, there are several
companies devoted to development and commercialization of monoclonal
antibody-based products and peptide-based products. The Company is likely to
encounter significant competition with respect to its proposed products
currently under development. Many of the Company's competitors which are engaged
in the biopharmaceutical field, and in particular the development of
peptide-based products, have substantially greater financial and technological
resources and marketing capabilities than the Company, and have significantly
greater experience in research and development. Many of the Company's
competitors which are engaged in the radiopharmaceutical field, and in
particular the development of antibody- and peptide-based products, have greater
financial and technological resources and marketing capabilities than the
Company, and have significantly greater experience in research and development.
Accordingly, the Company's competitors may succeed in developing products and
underlying technologies more rapidly than the Company, and in developing
products that are more effective and useful and are less costly than any that
may be developed by the Company, and may also be more successful than the
Company in manufacturing and marketing such products. Academic institutions,
hospitals, governmental agencies and other public and private research
organizations are also conducting research and seeking patent protection and may
develop competing products or technologies on their own or through collaborative
arrangements.
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The Company believes that the technological attributes of LeuTech,
including the ease of preparation, rapidity of imaging, apparent targeting
specificity and use of technetium-99m (the most widely available radioisotope)
will enable the Company to compete effectively in this market. However, the
Company is aware of at least one company developing an antibody-based product
which may compete with LeuTech as to certain indications, which product is
marketed in certain European countries and for which regulatory approval is
pending in the United States. The Company is also aware of another company
developing a peptide-based product which may also compete with LeuTech as to
certain indications.
The Company is aware of a number of companies developing technologies
relating to the use of peptides as drugs, including a variety of different
approaches to making conformationally-constrained short peptides.
The Company is pursuing areas of product development in which there is the
potential for extensive technological innovation in relatively short periods of
time. The Company's competitors may succeed in developing products that are
safer or more effective than those of the Company's proposed products. Rapid
technological change or developments by others may result in the Company's
proposed products becoming obsolete or non-competitive.
PATENTS AND PROPRIETARY INFORMATION
The Company aggressively seeks patent protection for its technology in the
United States and, selectively, in those foreign countries where in the
Company's judgment such protection is important to the development of the
Company's business.
The Company's patents and pending applications are directed to
radiolabeling of antibodies, antibody fragments, and peptides; MIDAS peptides;
and to methods for making and using the foregoing in diagnostic and therapeutic
applications. The Company owns or has rights to 16 U.S. patents, eight pending
U.S. patent applications, four allowed U.S. patent applications and nine
counterpart patents and eight pending applications in selected foreign
countries.
Certain of the patents and pending applications owned by the Company have
been assigned to Aberlyn to secure long-term financing but the Company has
retained the exclusive right to practice these patents itself and to grant
licenses under these patents to third parties. The Company is obligated to make
monthly payments to Aberlyn in discharge of the Company's debt obligation of
$91,695 per month through May 1, 1999. On completion of scheduled payments, all
rights to the patents and pending applications will be assigned to the Company.
In the event of default by the Company, Aberlyn has the right to require the
Company to cease using the patents, and to sell or exclusively license the
patents to other parties. The patents and pending applications pertain to
LeuTech and PT-5. In addition, the Company has semi-exclusive rights in a basic
United States patent relating to direct radiolabeling of antibodies, and its
Canadian counterpart.
Two of the Company's basic U.S. patents for direct radiolabeling of
antibodies and other proteins were involved in a priority-of-invention contest
(interference) in the U.S. Patent and Trademark Office with a patent application
owned by a third party. This proceeding has been settled, and the Company's
patents have emerged from reissue proceedings in which the scope of the
Company's claims has been somewhat limited. The Company believes that the
current claim scope
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will not materially adversely affect the Company's current product development
plans, and is sufficient to protect the Company's underlying inventions.
One of the Company's granted European patents (directed to selection of
patient-specific antibody cocktails) is involved in an opposition proceeding at
the European Patent Office. The Company has received a favorable first decision,
but the opposing party has filed an appeal. The Company believes that the final
outcome of this proceeding, even if adverse to the Company, will not have a
material adverse effect on the Company's current product development plans.
The Company's success will depend in substantial part on its ability to
obtain patents, defend and enforce its patents, maintain trade secrets and
operate without infringing upon the proprietary rights of others, both in the
United States and abroad.
In general, the patent positions of companies relying upon biotechnology
are highly uncertain in general and involve complex legal and factual questions.
To date there has emerged no consistent policy regarding the breadth of claims
that are properly accorded to biotechnology patents. There can thus be no
assurance that patents will issue from the patent applications filed by the
Company or its licensors or that the scope of any claims granted in any patent
will provide meaningful proprietary protection or a competitive advantage to the
Company. There can be no assurance that the validity or enforceability of
patents issued or licensed to the Company will not be challenged by others or,
if challenged, will be upheld by a court. In addition, there can be no assurance
that competitors will not be able to circumvent any patents issued or licensed
to the Company. In the United States, patent applications are maintained in
secrecy until they issue as patents, and thus publications in the scientific
literature lag behind actual discoveries. Scientific publications also generally
appear after a patent application, if any, is filed. As a result of delayed
publication, the Company cannot be certain that its scientists were the first to
make inventions covered by its patents and patent applications.
In the event a third party has also filed a patent application relating to
an invention claimed in a Company patent application, the Company may be
required to participate in an interference proceeding adjudicated by the United
States Patent and Trademark Office to determine priority of invention. The
possibility of an interference proceeding could result in substantial
uncertainties and cost for the Company, even if the eventual outcome is
favorable to the Company. An adverse outcome could result in the Company losing
patent protection for the subject of the interference, subject the Company to
significant liabilities to third parties and require the Company to obtain
licenses from third parties at undetermined cost or to cease using the
technology.
While no patent that would be infringed by manufacture, use or sale of the
Company's proposed products has come to the attention of the Company, the
Company's proposed products are still in the development stage, and neither
their formulations nor their method of manufacture is finalized. Moreover,
patents, the claims of which would be infringed by the Company's commercial
activities, might not have yet been issued. There can thus be no assurance that
the manufacture, use or sale of the Company's proposed products will not
infringe patent rights of others. The Company may be unable to avoid
infringement of any such patents and may have to seek a license, defend an
infringement action, or challenge the validity of such patents in court. There
can be no assurance that a license will be available to the Company, if at all,
upon terms and conditions acceptable to the Company or that the Company will
prevail in any patent litigation. Patent litigation is costly and time
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consuming, and there can be no assurance that the Company will have sufficient
resources to pursue such litigation. If the Company does not obtain a license
under any such patents, is found liable for infringement, or is not able to have
them declared invalid, the Company may be liable for significant money damages,
may encounter significant delays in bringing products to market, or may be
precluded from participating in the manufacture, use or sale of products or
methods of treatment covered by such patents.
The Company relies substantially in its product development activities on
certain technologies which are neither patentable nor proprietary and are
therefore potentially available to the Company's competitors. The Company also
relies on certain proprietary technologies (trade secrets and know-how) which
are not patentable. Although the Company has taken steps to protect its
unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
contractors, there can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors. If the Company's employees, scientific
consultants or collaborators develop inventions or processes independently that
may be applicable to the Company's product candidates, disputes may arise about
ownership of proprietary rights to those inventions and processes. Such
inventions and processes will not necessarily become the Company's property, but
may remain the property of those persons or their employers. Protracted and
costly litigation could be necessary to enforce and determine the scope of the
Company's proprietary rights. Failure to obtain or maintain patent and trade
secret protection, for any reason, could have a material adverse effect on the
Company.
Certain of the Company's patents are directed to inventions developed
within the Company or within academic institutions from which the Company
earlier acquired rights to such patents with funds from United States government
agencies. As a result of these arrangements, the United States government may
have rights in certain inventions developed during the course of the performance
of federally funded projects as required by law or agreements with the funding
agency.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication of pending patent applications, modifications of the patent term,
re-examination, subject matter and enforceability. It is not certain whether any
of these bills will be enacted into law or what form new laws may take.
Accordingly, the effect of legislative change on the Company's intellectual
property estate is uncertain.
GOVERNMENTAL REGULATION
The manufacture and marketing of the Company's proposed products requires
approval of the FDA and comparable agencies in foreign countries and state
regulatory authorities. The FDA has established regulations and guidances which
apply, among other things, to the clinical testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, approval, advertising, promotion
and marketing of the Company's proposed products. Noncompliance with applicable
requirements can result in fines, recalls or seizures of products, total or
partial suspension of production, refusal of the FDA to approve marketing
applications and criminal prosecution.
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In most cases, there is a substantial period of time between conception of
a proposed product and its approval for commercial sale. Determining product
formulation and manufacturing can take a number of years to complete, as can
pre-clinical studies. Clinical trials and related studies can also take a number
of years to complete. The period between the date of submission of an
application for approval to market and the date of approval by the FDA has
averaged two to four years for diagnostic imaging products, although the
approval process may take longer. The length of time of the approval process is
a function of a number of variables, including the quality of the submission and
studies presented, the potential contribution that the proposed product will
make in improving the treatment of the disease in question and the workload at
the FDA. There can be no assurance that any of the Company's proposed products
will successfully proceed through the approval process or that any of the
proposed products will be approved in any specific period of time. Depending
upon marketing and distribution plans and arrangements for a particular product,
the Company may require additional time before a proposed product can be made
available for commercial sale, if at all.
The steps required before pharmaceutical products can be produced and
marketed usually include pre-clinical non-human studies, the filing of an IND
application, clinical trials and the filing and approval of a Biologics License
Application ("BLA") for products classified as "biologics" or filing and
approval of a New Drug Application ("NDA") for drug products. LeuTech is subject
to the requirement of a BLA, while PT-5 and proposed products based on the
Company's MIDAS technology are subject to the requirement of a NDA.
Pre-clinical studies are conducted in the laboratory and in animal model
systems to gain preliminary information on the drug's effectiveness and to
identify major safety problems. The results of these studies are submitted to
the FDA as part of the IND application before approval can be obtained for the
commencement of testing in humans. The clinical testing program required for a
new biological or pharmaceutical product typically involves three sequential
phases, but the phases may overlap. In the initial clinical evaluation, Phase I,
the product is tested for safety, dosage tolerance, distribution, excretion and
pharmacodynamics. Phase II involves studies in a limited patient populations to
evaluate the effectiveness of the product for a particular indication, to refine
optimal dosage and schedules of administration, and to identify possible side
effects and risks. For diagnostic imaging agents, such as LeuTech, typically the
smallest quantity of product producing satisfactory images will be employed. For
therapeutic products the side effects and risks of increased doses must be
balanced against increased therapeutic benefits. For radiolabeled therapeutic
products, such as PT- 5, the radiation dose to critical organs provides an upper
limit to the dosage. When a product appears to be effective in Phase II trials,
it is then evaluated in Phase III clinical trials. Phase III trials consist of
additional testing for effectiveness and safety with an expanded patient group,
usually at multiple test sites. Therapeutic products are often compared to
standard treatments, if such treatments exist, to determine relative
effectiveness in randomized trials.
When Phase III studies are complete, the results of the pre-clinical and
clinical studies, along with manufacturing information, are submitted to the FDA
in the form of either a BLA or a NDA. Both the BLA and NDA involve considerable
data collection, verification and analysis, the preparation of summaries of the
production and testing processes, pre-clinical studies and clinical trials. The
FDA must approve the BLA or NDA, as applicable, before the product may be
marketed. The FDA may deny a BLA or NDA if applicable regulatory criteria are
not satisfied, may require
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additional testing or information, or may require post-marketing testing,
including extensive Phase IV studies, and surveillance to monitor the effects of
the product in general use. Product approvals may be withdrawn if compliance
with regulatory standards is not maintained or if problems occur following
initial marketing. In addition, the FDA may in some circumstances impose
restrictions on the use of the drug that may limit its market potential.
In addition to obtaining either BLA or NDA approval from the FDA for any
of the Company's proposed products, if the proposed product is manufactured in
the United States the drug manufacturing establishment must be registered with,
and inspected by, the FDA. Such drug manufacturing establishments are subject to
biennial inspections by the FDA, and must comply with GMP regulations enforced
by the FDA. To supply products for use in the United States, foreign
manufacturing establishments must comply with GMP and are subject to periodic
inspection by the FDA or by corresponding regulatory agencies in such other
countries under reciprocal agreements with the FDA. In complying with standards
established by the FDA, manufacturing establishments must continue to expend
time, money and effort in the areas of production and quality control to ensure
full technical compliance. Components of LeuTech are manufactured by contract
manufacturing establishments both in the United States and in foreign countries,
and the Company anticipates that PT-5 will be manufactured by contract
manufacturing establishments. The Company is dependent on such contract
manufacturing establishments for, and will have only limited control over, the
commercial manufacturing of it's proposed products in compliance with FDA and
other regulatory requirements.
The Company has very limited experience in conducting clinical trials.
Clinical trials are conducted in accordance with FDA regulations covering
protection of human subjects and clinical practice protocols detailing the
objectives of the study, parameters for monitoring safety and criteria for
determining effectiveness. The Company will either need to rely on third parties
to design and administer required clinical trials or expend resources to hire
additional personnel to administer such clinical trials. There can be no
assurance that the Company will be able to find appropriate third parties to
design and administer clinical trials or that the Company will have the
resources to hire personnel to administer clinical trials.
No proposed product being evaluated by the Company has been submitted for
approval or approved by the FDA or any other regulatory authority for marketing,
and there can be no assurance that any such product will ever be approved for
marketing or that the Company will be able to obtain the labeling claims desired
for its proposed products. The Company is and will continue to be dependent upon
laboratories and medical institutions conducting its pre-clinical studies and
clinical trials to maintain both good laboratory and good clinical practices
consistent with FDA regulations. Data obtained from pre-clinical studies and
clinical trials are subject to varying interpretations which could delay, limit
or prevent FDA regulatory approval. Delays or rejections may be encountered
based upon changes in FDA policy for drug approval during the period of
development and FDA regulatory review. Similar delays also may be encountered in
foreign countries.
There can be no assurance that FDA or other regulatory approval for any
proposed products developed by the Company will be granted on a timely basis, or
at all. Delay in obtaining or failure to obtain such regulatory approvals will
have a material adverse effect on the Company.
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MANUFACTURING AND MARKETING
To be successful, the Company's products must be manufactured in
commercial quantities under GMP requirements prescribed by the FDA and at
acceptable costs. The Company has not yet manufactured any pharmaceutical
products in commercial quantities and currently does not have the facilities to
manufacture any products in commercial quantities under GMP. In the event the
Company determines to establish a manufacturing facility, it will require
substantial additional funds, the hiring and retention of significant additional
personnel and compliance with extensive regulations applicable to such a
facility. The Company has no experience in commercial pharmaceutical
manufacturing, and there can be no assurance that the Company will be able to
establish such a facility successfully and, if established, that it will be able
to manufacture products in commercial quantities for sale at competitive prices.
If the Company determines to rely on collaborators, licensees or contract
manufacturers for the commercial manufacture of its products, the Company will
be dependent on such corporate partners or other entities for, and will have
only limited control over, the commercial manufacturing of its products. While
the Company has entered into manufacturing arrangements as to certain portions
of the manufacture of LeuTech, there can be no assurance that the contract
manufacturer will perform as agreed or will remain in the contract manufacturing
business for the time required by the Company, or that the Company will be able
to enter into such manufacturing arrangements as to remaining portions of the
manufacture of LeuTech. There can be no assurance that the Company will be able
to enter into any such manufacturing arrangements as to its other proposed
products on acceptable terms, if at all.
LeuTech requires purified monoclonal antibody, made from a specific parent
cell line. There are, on a global basis, a limited number of contract
manufacturers capable of producing purified monoclonal antibodies. The Company
has entered into a manufacturing arrangement with a third-party contract
manufacturer for production and purification of the monoclonal antibody required
for LeuTech, and has retained other third-party manufacturers for compounding
steps, vialing and lyophilization.
Proposed products resulting from MIDAS technology and PT-5 are synthetic
peptides. The peptides are synthesized from readily available amino acids, and
the production process involves well-established technology. The Company
currently contracts with third-party manufacturers for the production of
peptides and anticipates doing so in the future.
PT-5 requires a source of radioactive rhenium in order to be
commercialized. There can be no assurance that, regardless of the status of
product development by the Company, any acceptable form of radioactive rhenium
will ever be commercially available in the United States or other countries. See
"Direct Radiolabeling Technology -- PT-5 Cancer Therapeutic Product."
The Company intends to package and ship its radiopharmaceutical products
in the form of non-radioactive kits. Prior to patient administration, the
product would be radiolabeled with the specified radioisotope, generally by a
specialized radiopharmacy. The Company does not intend to sell or distribute any
radioactive substance.
The Company has limited experience in marketing, including distribution
and sales, of pharmaceutical products, and will have to develop a sales force
and/or rely on its collaborators,
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licensees or arrangements with others to provide for the marketing, distribution
and sales of its products. If the Company determines to rely on collaborators,
licensees or arrangements with others for the marketing, distribution and sales
of its proposed products, the Company will be dependent on such collaborators
and others for, and will have only limited control over, marketing, distribution
and sales of its proposed products.
Successful sales of the Company's proposed products in the United States
and other countries will depend on the availability of adequate reimbursement
from third-party payors such as governmental entities, managed care
organizations and private insurance plans. Reimbursement by a third-party payor
may depend on a number of factors, including the payor's determination that use
of a product is safe and efficacious, neither experimental nor investigational,
medically necessary, appropriate for the specific patient and cost effective.
Since reimbursement approval is required from each payor individually, seeking
such approvals is a time-consuming and costly process. Third-party payors
routinely limit reimbursement coverage and in many instances are exerting
significant pressure on medical suppliers to lower their prices. There is
significant uncertainty concerning third-party reimbursement for the use of any
pharmaceutical product incorporating new technology, and there is no assurance
that third-party reimbursement will be available for the Company's proposed
products, or that such reimbursement, if obtained, will be adequate. Less than
full reimbursement by governmental and other third-party payors for the
Company's products would adversely affect the market acceptance of these
products and would also have a material adverse effect on the Company. Further,
health care reimbursement systems vary from country to country, and there can be
no assurance that third-party reimbursement will be made available for the
Company's proposed products under any other reimbursement system.
PRODUCT LIABILITY AND INSURANCE
The Company's business may be affected by potential product liability
risks which are inherent in the testing, manufacturing and marketing of proposed
pharmaceutical products to be developed by the Company. There can be no
assurance that product liability claims will not be asserted against the
Company, its collaborators or licensees. The use of proposed products developed
by the Company in clinical trials and the subsequent sale of such proposed
products is likely to cause the Company to bear all or a portion of those risks.
Such litigation claims could have a material adverse effect on the Company. The
Company has liability insurance providing up to $1,000,000 coverage per
occurrence and in the aggregate as to certain clinical trial risks, and will
seek to obtain additional product liability insurance before the
commercialization of its products. There can be no assurance, however, that
insurance will be available to the Company on acceptable terms, if at all, or
that such coverage once obtained would be adequate to protect the Company
against future claims or that a medical malpractice or other claim would not
materially and adversely affect the Company. Furthermore, there can be no
assurance that any collaborators or licensees of the Company will agree to
indemnify the Company, be sufficiently insured or have a net worth sufficient to
satisfy any such product liability claims. In addition, products such as those
proposed to be sold by the Company may be subject to recall for unforeseen
reasons. Such a recall could have a material adverse effect on the Company.
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EMPLOYEES
As of June 30, 1997, the Company employed 16 persons full time, of whom 11
were engaged in research and development activities and 5 were engaged in
administration and management. Of the Company's employees, 4 hold Ph.D. degrees.
The Company, from time to time, hires scientific consultants to work on certain
of its research and development programs. The Company believes that it has been
successful in attracting skilled and experienced scientific personnel; however,
competition for such personnel is intense.
None of the Company's employees is covered by a collective bargaining
agreement. The Company's employees have executed confidentiality agreements. The
Company considers relations with its employees to be good.
The Company relies, in substantial part, and for the foreseeable future
will rely, on certain independent organizations, advisors and consultants to
provide certain services, including substantially all aspects of manufacturing,
regulatory approval and clinical management. There can be no assurance that the
services of independent organizations, advisors and consultants will continue to
be available to the Company on a timely basis when needed, or that the Company
could find qualified replacements. The Company's advisors and consultants
generally sign agreements that provide for confidentiality of the Company's
proprietary information. However, there can be no assurance that the Company
will be able to maintain the confidentiality of the Company's technology, the
dissemination of which could have a material adverse effect on the Company.
PROPERTY
The Company's headquarters are located at 214 Carnegie Center, Suite 100,
Princeton, New Jersey, where it leases approximately 4,000 square feet under a
lease which expires July 31, 2002. In March 1997, the Company entered into a
ten-year lease on approximately 10,500 square feet for use as a research and
development facility in Edison, New Jersey, with a lease term commencing August
1, 1997. The Company also leases approximately 14,000 square feet in
Albuquerque, New Mexico, which currently serves as the Company's research and
development facility, under a lease which expires August 31, 1997. Upon
expiration of the Albuquerque facility lease, the Company intends to close the
Albuquerque facility and relocate all its research and development to the Edison
facility.
LEGAL PROCEEDINGS
In April 1996, prior to the Merger, the Company and one of its
subsidiaries, Interfilm Technologies, Inc. (collectively, "IT"), filed a
complaint initiating the IT Litigation in the Supreme Court of the State of New
York, County of New York, against Sony for breach of contract and breach of duty
of good faith and fair dealing, seeking contract damages of $18 million,
punitive damages of $100 million and costs. The IT Litigation relates solely to
the business activities of the Company prior to the Merger and, pursuant to the
Merger, was included in certain assets and liabilities of the Company
transferred to the Partnership solely for the benefit of the Company's
stockholders as of June 21, 1996. Accordingly, the litigation is under the
control of and at the expense of the Partnership, and the Company will receive
no financial benefit from the litigation, even if the litigation is successfully
concluded. The assets of the Partnership, including any proceeds from
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the IT Litigation, whether by judgment, settlement or otherwise, are available
to indemnify the Company from certain liabilities arising out of the Merger.
The causes of action in the IT Litigation relate to the actions or
inactions of Sony under certain agreements entered into between IT and Sony in
April 1993, and as amended in November 1993 and October 1994 (collectively, the
"Sony-IT Agreement"). Pursuant to the original terms of the Sony-IT Agreement,
Sony was obligated, among other things, to develop, produce, market, distribute
and exhibit three Cinematic Games. Subsequently, at Sony's request, the Sony-IT
Agreement was amended so that Sony's commitment to produce Cinematic Games was
reduced to two Cinematic Games in exchange for, among other things, an increased
financial marketing commitment by Sony. The first Sony-financed Cinematic Game
was initially slated for release in the first half of 1994, which release was
delayed until February 1995. Among other things, IT alleges that the delay in
the opening of the first Cinematic Game, which delay IT alleges was primarily a
result of Sony's failure to abide by the terms of the Sony-IT Agreement,
seriously harmed IT. Under the terms of the amended Sony-IT Agreement, Sony was
obligated to begin principal photography of the next Sony-financed Cinematic
Game by May 15, 1995.
In November 1996, Sony asserted two counterclaims in the IT Litigation,
generally alleging that the Company's pre-Merger executives misrepresented their
qualifications and breached the Sony-IT Agreement by not recruiting sufficient
exhibitors. The counterclaims relate solely to the business activities of the
Company prior to the Merger. A denial of the material allegations in the
counterclaims has been filed on behalf of the Company in the IT Litigation. The
Partnership is obligated to indemnify the Company from certain claims, including
all liabilities and reasonable expenses and costs that the Company may incur as
a result of the IT Litigation, and the Company is closely monitoring the IT
Litigation. The Company has incurred no out-of-pocket expenses in connection
with the IT Litigation. The Company believes that the Partnership's assets
consist primarily of the IT Litigation, certain intellectual property assets and
cash assets of approximately $75,000, with liabilities (primarily contingent on
a recovery in the IT Litigation) totaling approximately $731,500. Based upon the
opinion of the Company's counsel of record in the IT Litigation, the Company
believes that the counterclaims are without merit. However, the Company may be
liable in the event that a judgment is rendered against the Company on the
counterclaims, and the assets of the Partnership may not be sufficient to
provide full indemnification.
The Company is involved in various other claims and litigations arising in
the normal course of business, consisting of actions commenced against the
Company prior to the Merger. Management believes that the outcome of such claims
and litigation will not have a material adverse effect on the Company.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name and positions of the executive officers
and directors of the Company:
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NAME AGE POSITION WITH THE COMPANY
- -----------------------------------------------------------------
Edward J. Quilty (1) 46 Chairman of the Board, President, Chief
Executive Officer and Director
Carl Spana, Ph.D. 34 Executive Vice President, Chief
Technology Officer and Director
Charles Putnam 44 Executive Vice President
John J. McDonough 33 Vice President and Chief Financial
Officer
Michael S. Weiss (2) 31 Director
James T. O'Brien (2) 58 Director
Richard J. Murphy (1) 66 Director
John K.A. Prendergast, Ph.D. (1) 43 Director
- ------------------------
(1) Member of the Compensation Committee. Mr. Quilty, as President of the
Company, is a member EX OFFICIO of the Compensation Committee.
(2) Member of the Audit Committee.
EDWARD J. QUILTY has been Chairman of the Board, President, Chief Executive
Officer and a director of the Company since June 25, 1996, the effective date of
the Merger, and has been Chief Executive Officer and a director of RhoMed since
November 1995. From July 1994 through November 1995, Mr. Quilty was President,
Chief Executive Officer and a director of MedChem Products, Inc. ("MedChem"), a
publicly traded medical device company, which in September 1995 was merged into
C.R. Bard, Inc. From March 1992 through July 1994, Mr. Quilty served as
President and Chief Executive Officer of Life Medical Sciences, Inc. ("Life
Medical"), a publicly traded biotechnology company. From January 1987 through
October 1991, Mr. Quilty served as Executive Vice President of McGaw Inc., a
publicly traded pharmaceutical company. Mr. Quilty is also Chairman of the Board
and a director of Derma Sciences, Inc., a publicly traded medical device
company. Mr. Quilty received his M.B.A. from Ohio University, and a B.S. from
Southwest Missouri State University.
CARL SPANA, Ph.D., has been a director of the Company since June 25, 1996,
the effective date of the Merger, and has been a director of RhoMed since July
1995. Since June 1996, Dr. Spana has served as Executive Vice President and
Chief Technology Officer of the Company and RhoMed. From May 1996 to June 1996,
Dr. Spana was Vice President of Paramount Capital Investments, a biotechnology
and biopharmaceutical merchant banking firm. From June 1993 to May 1996, Dr.
Spana was Vice President of The Castle Group Ltd. ("Castle Group"), a medical
venture capital firm. At Paramount Capital Investments and at Castle Group, Dr.
Spana was responsible for discovering,
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evaluating, and commercializing biotechnologies. Through his work at
Paramount Capital Investments and Castle Group, Dr. Spana co-founded several
private biotechnology firms. From July 1991 to June 1993, Dr. Spana was a
Research Associate at Bristol-Myers Squibb, a publicly traded pharmaceutical
company, where he was involved in scientific research in the field of
immunology. Dr. Spana is a director of and was Interim President of Avax
Technologies, Inc. ("Avax"), a publicly traded medical technology company. Dr.
Spana received his Ph.D. in Molecular Biology from The Johns Hopkins University
and a B.S. in Biochemistry from Rutgers University.
CHARLES PUTNAM has been Executive Vice President of the Company since June
25, 1996, the effective date of the Merger, and is responsible for operations,
product development and regulatory and clinical affairs. From July 1994 to May
1996, Mr. Putnam was Executive Vice President, Research and Development, of
MedChem. At MedChem, Mr. Putnam was responsible for product development,
regulatory affairs, clinical research and quality control. From March 1993 to
July 1994, Mr. Putnam was Vice President of Operations and Research and
Development of Life Medical, where he was responsible for all aspects of
manufacturing, product development and regulatory affairs for the company's
commercial product line. From March 1983 to March 1993, Mr. Putnam was employed
by American Cyanamid Corporation in a variety of positions, including Director
of Device Development.
JOHN J. McDONOUGH has been Vice President and Chief Financial Officer of
the Company since June 25, 1996, the effective date of the Merger, and has been
Vice President and Chief Financial Officer of RhoMed since December, 1995. From
January 1992 through December 1995, Mr. McDonough was employed by MedChem in
various positions, his final position being Vice President and Chief Financial
Officer. Previously, Mr. McDonough was a manager with KPMG Peat Marwick. Mr.
McDonough received his B.S. in Accountancy from Bentley College and is a
candidate for an M.B.A. from Harvard Business School due to graduate in June
1998.
MICHAEL S. WEISS has been a director of the Company since June 25, 1996,
the effective date of the Merger, and has been a director of RhoMed since July
1995. Since November 1993, Mr. Weiss has been Associate General Counsel and then
General Counsel of Paramount Capital Investments and Senior Managing Director of
the Placement Agent. From 1991 to October 1993, Mr. Weiss was an attorney with
Cravath, Swaine & Moore. Mr. Weiss also serves on the Board of Directors of
Xytronyx, Inc., Avax, as Secretary of Atlantic Pharmaceuticals, Inc. ("Atlantic
Pharmaceuticals"), and as interim Chairman of the Board and on the Board of
Directors of Genta Incorporated and as Chairman of the Board and on the Board of
Directors of Procept Inc., all publicly traded medical technology companies. Mr.
Weiss received his J.D. from Columbia University School of Law and a B.S. in
Finance from The State University of New York at Albany.
JAMES T. O'BRIEN has been a director of the Company since August 1, 1996.
Since November 1991, Mr. O'Brien has been Chairman of the Board of Access
Corporation, a provider of employment software and information. Since July 1996,
Mr. O'Brien has been President and Chief Executive Officer of O'Brien Marketing
and Communications, an advertising and communications company. From 1989 to 1991
Mr. O'Brien was President and Chief Operating Officer of Elan Corporation, PLC,
a publicly traded pharmaceutical company. From 1986 to 1989, Mr. O'Brien was
President and Chief Executive Officer of O'Brien Pharmaceuticals, Inc. Prior to
this, Mr. O'Brien
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held various management positions with Revlon Health Care Group, including
President of USV Laboratories and the Armour Pharmaceutical Company; Lederle
Laboratories; and Sandoz Pharmaceuticals, Inc. Mr. O'Brien is a director of
Carrington Laboratories, Inc., a publicly traded pharmaceutical and medical
devices company, and Theratech, Inc., a publicly traded pharmaceutical and drug
delivery company.
RICHARD J. MURPHY has been a director of the Company since August 1, 1996.
From May 1984 until his retirement in January 1993, Mr. Murphy was a Senior Vice
President and director of Hoffmann LaRoche Inc., a pharmaceutical company, where
he was responsible for two operating divisions, Roche Diagnostics and Roche
Vitamin and Fine Chemicals. Mr. Murphy had held various marketing and
administrative positions with Hoffmann LaRoche Inc. since 1964. Mr. Murphy is a
director of I.D. Biomedical Corp., a publicly traded Canadian biotechnology
firm, and D.G.I. Biotechnologies, a biotechnology firm.
JOHN K.A. PRENDERGAST, Ph.D. has been a director of the Company since
August 28, 1996. Dr. Prendergast has served as a Managing Director of Paramount
Capital Investments since May 1996, and was a Managing Director of Castle Group
from October 1991 to May 1996. Dr. Prendergast is a co-founder and director of
Avigen, Inc. ("Avigen"), a medical technology company, and, from December 1992
to March 1996, served as a Vice President and the Treasurer of Avigen, Inc. Dr.
Prendergast is a co-founder and director of Xenometrix, Inc., Avax, and Atlantic
Pharmaceuticals, all publicly traded medical technology companies. Dr.
Prendergast received M.Sc. and Ph.D. degrees from the University of New South
Wales, Sydney, Australia and a C.S.S. in Administration and Management from
Harvard University.
There are no family relationships between directors or executive officers.
All directors hold office until the next annual meeting of stockholders of
the Company and until their successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors.
Certain of the officers and directors of the Company currently do and may
from time to time in the future serve as officers or directors of other
biopharmaceutical or biotechnical companies. There can be no assurance that such
other companies will not in the future have interests in conflict with those of
the Company. See "Risk Factors -- Certain Interlocking Relationships; Potential
Conflicts of Interest."
BOARD COMMITTEES
The Delaware General Corporation Law and the bylaws of the Company provide
that the Board of Directors, by resolution adopted by a majority of the entire
Board of Directors, may designate one or more committees, each of which shall
consist of one or more directors; presently, the Board of Directors annually
elects from its members an Audit Committee and a Compensation Committee.
AUDIT COMMITTEE. The Audit Committee reviews the engagement of the
independent accountants and reviews the independence of the accounting firm. The
Audit Committee also reviews
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the adequacy of the Company's internal control procedures. The Audit
Committee is composed of two non-employee directors, Mr. O'Brien and Mr. Weiss.
COMPENSATION COMMITTEE. The Compensation Committee reviews and recommends
to the Board of Directors remuneration arrangements, compensation plans and
option grants for the Company's officers, key employees, directors and others.
The Compensation Committee is composed of Mr. Murphy and Dr. Prendergast, with
Mr. Quilty serving as a member EX OFFICIO as President of the Company.
COMPENSATION OF DIRECTORS
Pursuant to the 1996 Stock Option Plan, which was adopted by the Board of
Directors subject to stockholder approval, each director of the Company who is
not an employee of the Company or of a parent or subsidiary of the Company (a
"Non-Employee Director") will be granted, at the first meeting of the Board of
Directors following each annual meeting of the stockholders of the Company, an
option to purchase 10,000 shares of Common Stock at a per share exercise price
equal to the fair market value of a share of Common Stock on the date of grant,
which options are to vest as to 25% per of the option granted during each year,
starting one year after the date of grant (a "Non-Employee Director's Formula
Option"). Any Non-Employee Director who is elected to the Board of Directors
after August 28, 1996 and before the annual stockholders' meeting in any year
will also be granted a Non-Employee Director's Formula Option to purchase a
pro-rata portion of 10,000 shares equal to the portion of a year (measured in
full calendar months) remaining until the next scheduled annual stockholders'
meeting. All Non-Employee Directors serving on the date the Board of Directors
adopted the 1996 Stock Option Plan (Richard J. Murphy, James T. O'Brien, John
K.A. Prendergast and Michael S. Weiss) were granted initial Non-Employee
Director's Formula Options to purchase 20,000 shares of Common Stock at an
exercise price of $1.36 per share with the same exercise price and vesting
conditions as regular Non-Employee Director's Formula Options.
Non-Employee Directors are paid $12,000 per year, plus expenses, for
services as a director. The Board of Directors agreed that in lieu of $4,000
which was due to each of the Non-Employee Directors as of December 1996, such
directors may be granted a non-incentive stock option pursuant to the 1996 Stock
Option Plan, subject to stockholder approval of the 1996 Stock Option Plan, to
purchase 4,266 shares of Common Stock at an exercise price of $1.875 per share,
which was the fair market value per share on the date of grant. Such options are
immediately exercisable and expire ten (10) years from the date of grant. Mr.
Murphy, Mr. O'Brien and Mr. Weiss were each granted such options. The Company
paid no compensation to any director for services as a director during the
ten-month period ended June 30, 1996. Employee directors are not separately
compensated for services as a director, but are reimbursed for expenses incurred
in performing their duties as directors, including attending all meetings of the
Board of Directors and any committees thereof. Service as a director is a
condition of Edward J. Quilty's employment agreement, but such service is not
separately compensated. See "Employment Agreements."
In July 1996, the Company paid $36,000 to Buck A. Rhodes, Ph.D., a former
director of the Company and RhoMed, as severance compensation for resigning from
the board of RhoMed effective June 30, 1996. The resignation and severance pay
were pursuant to the terms of a consulting agreement dated as of March 7, 1996,
between RhoMed and Dr. Rhodes.
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation, or serving at the request of the corporation in similar capacities,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of an action
or suit by or in the right of the corporation, no indemnification shall be made
with respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the court having jurisdiction shall determine that such person is fairly and
reasonably entitled to indemnity.
Article V, Section 3 of the Company's Certificate of Incorporation
provides that to the fullest extent permitted by the Delaware General
Corporation Law, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of a fiduciary duty
as a director.
Article VI of the Company's Certificate of Incorporation provides that the
Company shall make the indemnification permitted under Section 145 of the
Delaware General Corporation Law, as summarized above, but only (unless ordered
by a court) upon a determination by a majority of a quorum of disinterested
directors, by independent legal counsel in a written opinion, or by the
stockholders, that the indemnified person has met the applicable standard of
conduct. Article VI further provides that the Company may advance expenses for
defending actions, suits or proceedings upon such terms and conditions as the
Company's Board of Directors deems appropriate, and that the Company may
purchase insurance on behalf of indemnified persons whether or not the Company
would have the power to indemnify such persons under Section 145 the Delaware
General Corporation Law.
The Company's Bylaws contain substantially the same indemnification
provisions as the Company's Certificate of Incorporation, summarized above.
The Company's employment agreement with Edward J. Quilty requires the
Company to indemnify and advance expenses to Edward J. Quilty, the Company's
Chairman of the Board, President and Chief Executive Officer, to the fullest
extent permitted under Section 145 of the Delaware General Corporation Law.
The Company has obtained a directors' and officers' liability insurance
policy which covers, among other things, certain liabilities arising under the
Securities Act.
In the agreements pursuant to which the Company has registered the Offered
Shares (the "Registration") on Form SB-2 (the "Registration Statement"), the
Company has agreed, to the extent permitted by law, to indemnify each Selling
Stockholder (with the exception of Bioquest Venture Leasing Partnership L.P.),
control persons of Selling Stockholders and underwriters of the Offered
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Shares against liabilities arising out of untrue statements or omissions of
material facts in the Registration Statement or this Prospectus, except to the
extent that the untrue statement or omission is based on written information
provided by the Selling Stockholder for inclusion in the Registration Statement
or this Prospectus. Each Selling Stockholder (with the exception of Bioquest
Venture Leasing Partnership L.P.) has agreed to indemnify the Company, its
directors, officers and control persons, and underwriters of the Offered Shares
against liabilities arising out of untrue statements or omissions of material
facts in the Registration Statement or this Prospectus, but only to the extent
that the untrue statement or omission is based on written information provided
by the Selling Stockholder for inclusion in the Registration Statement or this
Prospectus.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
1996 STOCK OPTION PLAN
The Board of Directors has adopted, subject to stockholder approval, the
1996 Stock Option Plan, pursuant to which the Company may grant both incentive
and non-incentive options to purchase up to 2,500,000 shares of Common Stock.
Except for the Non-Employee Director's Formula Options and under certain
circumstances regarding acquisitions being made by the Company, options are to
have exercise prices not less than the fair market value of the Common Stock on
the date of grant. Employees, non-employee directors and consultants of the
Company and its subsidiaries to whom the Company grants options are eligible to
participate in the 1996 Stock Option Plan. As of the date of this Prospectus,
the Company had granted options to purchase an aggregate of 739,798 shares of
Common Stock at exercise prices ranging from $1.36 to $2.00 per share. If the
1996 Stock Option Plan is not approved by the stockholders, the options already
granted under the 1996 Stock Option Plan will automatically terminate. See
"Description of Securities."
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the Company's Chief
Executive Officer and the other named executive officers for the last three
fiscal years. See note (1) to the following table, concerning the change in
fiscal year end. With respect to the persons and periods covered in the
following table, the Company made no restricted stock awards and had no
long-term incentive plan payouts.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) ($) SARS (#)(2) ($)
- - --------------------------------------- ----------- ---------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Edward J. Quilty,...................... 1997 $ 301,064 -- -- 960,301(4) --
Chief Executive Officer(3) 1996 $ 184,794 -- -- 712,297 --
1995 N/A N/A N/A N/A N/A
Carl Spana, Ph.D.,..................... 1997 $ 150,000 -- -- 167,066 --
Executive Vice President(5) 1996 $ 3,462 -- -- 296,790 $ 25,000(6)
1995 N/A N/A N/A N/A N/A
Charles L. Putnam,..................... 1997 $ 150,000 -- -- 167,066 --
Executive Vice President(7) 1996 $ 9.539 -- -- 296,790 --
1995 N/A N/A N/A N/A N/A
</TABLE>
- ----------------------
(1) The Company's fiscal year ends on June 30. Due to a change in the
Company's fiscal year end, fiscal year 1996 covers the ten-month
transition period from September 1, 1995 to June 30, 1996. Fiscal year
1995 ended August 31, 1995 (RhoMed's former fiscal year end). All
references to compensation before June 25, 1996 (the Merger date) relate
to compensation paid or issued by RhoMed.
(2) The security underlying all options is Common Stock.
(3) Mr. Quilty became an employee and Chief Executive Officer of RhoMed on
November 16, 1995 and became Chief Executive Officer of the Company on
June 25, 1996.
(4) Includes an anti-dilution option to purchase 281,031 shares of Common
Stock at $.05 per share granted on September 27, 1996, pursuant to the
terms of Mr. Quilty's employment agreement with the Company. See
"Employment Agreements" below. The September 27,
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1996 option replaced a canceled option to purchase the same number of
shares at $1.36 per share, originally granted by RhoMed on June 21, 1996
and included in the 1996 total. The $1.36 per share price of the June 21,
1996 option was not in accordance with the terms of Mr. Quilty's
employment agreement, so the Board of Directors replaced the June 21, 1996
option with the correctly priced September 27, 1996 option. Excluding that
replacement option, the options granted during fiscal 1997 were to
purchase a total of 679,270 shares.
(5) Dr. Spana became an employee of RhoMed on June 15, 1996 and an Executive
Vice President of the Company on June 25, 1996. Before becoming an officer
of the Company, he was a consultant to RhoMed.
(6) Consists of consulting fees paid by RhoMed.
(7) Mr. Putnam became an employee of RhoMed on June 3, 1996 and an Executive
Vice President of the Company on June 25, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted to the named executive
officers during the fiscal year ended June 30, 1997. The Company granted no
stock appreciation rights ("SARs").
Number of % of Total
Securities Options/SARs Exercise Market
Underlying Granted to or Base Price on Expira-
Options/SARs Employees Price the Date tion
Name Granted (#) in Fiscal Year ($/Sh) of Grant Date
Edward J. Quilty 281,031(1) 17.77% $0.05(1) $2.62 none
120,000(2) 7.59% $1.88 $1.88 12-12-06
330,168(3) 20.88% $0.05(3) $1.50 none
229,102(4) 14.49% $1.24(6) $1.50 6-2-07
Carl Spana, Ph.D. 60,000(2) 3.79% $2.00 $2.00 1-3-07
107,066(5) 6.77% $1.24(6) $1.50 6-2-07
Charles L. Putnam 60,000(2) 3.79% $2.00 $2.00 1-3-07
107,066(5) 6.77% $1.24(6) $1.50 6-2-07
- ----------------------
(1) Anti-dilution option granted pursuant to the Company's employment agreement
with Mr. Quilty. During the employment term, the option vests in 29 equal
monthly installments on
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the 16th of each month. The closing price of the Common Stock on the date
of grant, as reported on the Bulletin Board, was $2.62. See "Employment
Agreements."
(2) Immediately exercisable. Granted under the 1996 Stock Option Plan, which is
subject to stockholder approval.
(3) Anti-dilution option granted pursuant to the Company's employment agreement
with Mr. Quilty. During the employment term, the option vests in 18 equal
monthly installments on the 16th of each month following the date of grant.
The closing price of the Common Stock on the date of grant, as reported on
the Bulletin Board, was $1.50. See "Employment Agreements."
(4) Vests in 17 equal monthly installments on the 16th of each month after July
1, 1997.
(5) Vests in three equal installments, on July 1, 1997; July 1, 1998; and June
21, 1999.
(6) Non-plan option. The closing price of the Common Stock on the date of
grant, as reported on the Bulletin Board, was $1.50.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth each option exercise by a named executive
officer during the fiscal year ended June 30, 1997. Only Edward J. Quilty
exercised any options. The Company has no outstanding SARs. Fiscal year-end
values are based on a last reported sale price for the Common Stock, as reported
on the Bulletin Board on June 30, 1997, of $1.53125 per share.
Number of )
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
Shares FY-End (#) at FY-End ($)
Acquired Value
on Exercise Realized Exercisable/ Exercisable/
Name (#) ($) (1) Unexercisable Unexercisable
- ---- ----- --------- ------------- -------------
Edward J. Quilty 191,673 $310,065 290,569/909,325 $252,504/$1,073,451
Carl Spana, Ph.D. 0 -- 257,860/205,996 $33,884/$48,125
Charles L. Putnam 0 -- 158,930/304,926 $16,942/$65,066
- ----------------------
(1) Value realized is the closing market price of the stock on the date of
exercise less the option price, multiplied by the number of shares
acquired on exercise.
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EMPLOYMENT AGREEMENTS
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board of Directors. Each officer shall hold
his position until his successor is appointed and qualified. Mr. Quilty, Dr.
Spana and Mr. Putnam each hold their offices pursuant to employment agreements.
Subsequent to the Merger, the Company adopted, with amendments as required
to reflect the Merger, an employment agreement entered into on November 16, 1995
between RhoMed and Edward J. Quilty. Pursuant to this agreement, Mr. Quilty is
serving as President and Chief Executive Officer of the Company and RhoMed. The
initial term of the employment agreement was one year and it is automatically
renewed for successive twelve-month periods unless either party gives written
notice to the contrary, or unless the agreement is otherwise terminated. Mr.
Quilty's minimum base salary is $300,000 per year; his current salary is
$321,000 per year. The Company has agreed to reimburse Mr. Quilty for premiums
and other payments to maintain a $1,000,000 term life insurance policy issued in
1992 for the benefit of Mr. Quilty and his designees. Mr. Quilty may also
participate in any benefit plans available to other senior executives of the
Company, and in any directors' and officers' liability insurance which the
Company maintains. Pursuant to the employment agreement, RhoMed issued to Mr.
Quilty an option to purchase common stock equal to a 10% fully diluted equity
interest in RhoMed as of November 16, 1995, at a price of $0.01 per share, to
vest in 36 equal increments monthly during the term of the employment agreement.
By operation of the Merger, that option became an option for 431,266 shares of
Common Stock at an exercise price of $0.05 per share (rounded to the nearest
cent). To date, Mr. Quilty has exercised that option as to 191,673 shares. The
agreement also provides for anti-dilution protections which, among other things,
require the Company to issue additional options with the same exercise price as
the original option, so that Mr. Quilty shall, at all times, have options in the
aggregate to purchase the number of shares of Common Stock (together with Common
Stock purchased on the exercise of such options) equal to not less than 3.75% of
the Company's outstanding Common Stock on a fully diluted basis. Pursuant to the
anti-dilution protections, the Company has issued to Mr. Quilty additional
anti-dilution options to purchase an aggregate of 611,199 shares of Common
Stock, which options vest in equal monthly increments so as to become fully
vested 36 months after the commencement of the employment agreement. For a
period of five (5) years after the first anniversary of the Company's initial
post-Merger public offering, Mr. Quilty has piggy-back registration rights as to
all Common Stock which he owns. If the Company terminates the employment
agreement for "cause," or if Mr. Quilty terminates the agreement without "good
reason," then the Company's payment obligation is limited to amounts earned
through the termination date, and the option will be exercisable only to the
extent vested. If Mr. Quilty elects to terminate the employment agreement
following a post-Merger change in control of the Company, then the Company's
payment obligation is limited to amounts earned through the termination date,
but the option will immediately become exercisable in full. If the Company
terminates the employment agreement without cause, or in the event of Mr.
Quilty's death or disability, or if Mr. Quilty terminates the employment
agreement with good reason, then in addition to amounts earned through the
termination date, the Company must pay Mr. Quilty one year of his then current
base salary. "Cause," as defined in the employment agreement, consists of fraud,
felony conviction, refusal to carry out instructions of the Board of Directors,
or governmental
52
<PAGE>
disqualification (all as defined in the employment agreement). "Good reason," as
defined in the employment agreement, consists of breach by the Company of its
obligations under the employment agreement. The employment agreement also
includes non-competition, confidentiality and indemnification covenants.
Carl Spana, Ph.D., and Charles Putnam have each entered into employment
agreements with the Company dated September 27, 1996, pursuant to which each is
serving as an Executive Vice President of the Company for a three-year period
commencing June 21, 1996. Effective June 21, 1997, the base salary for each is
$160,500 per year. Each is entitled to participate in all bonus and benefit
programs that the Company establishes, to the extent his position, tenure,
salary, age, health and other qualifications make him eligible to participate.
Each agreement allows either the Company or the employee to terminate the
agreement on thirty (30) days' notice, and contains other provisions for
termination by the Company for "cause," or by the employee for "good reason"
after a "change in control" (all as these terms are defined in the respective
agreements). Early termination may, in some circumstances, result in accelerated
vesting of stock options and/or severance pay for a nine-month period at the
rate of base salary, cash bonus and benefits then in effect. Each agreement
contains non-competition and confidentiality covenants.
PRINCIPAL STOCKHOLDERS
Set forth below is information, as of the date of this Prospectus,
concerning the stock ownership and voting power of all persons (or groups of
persons) known by the Company to be the beneficial owner of more than five
percent (5%) of the Common Stock or Series A Convertible Preferred Stock, each
director of the Company, each of the executive officers included in the Summary
Compensation Table and all directors and executive officers of the Company as a
group.
AMOUNT AND
NATURE OF PERCENT PERCENT
TITLE OF NAME AND ADDRESS BENEFICIAL OF OF VOTING
CLASS OF BENEFICIAL OWNER OWNERSHIP (1)(2) CLASS POWER(2)
------- ------------------- ---------------- ----- --------
Common Edward J. Quilty 642,710(3) 5.1% *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
Common Carl Spana, Ph.D. 340,243(4) 2.7% *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
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<PAGE>
AMOUNT AND NATURE PERCENT OF PERCENT OF
TITLE OF NAME AND ADDRESS OF BENEFICIAL CLASS VOTING
CLASS OF BENEFICIAL OWNER OWNERSHIP (1)(2) POWER(2)
------- ------------------- ----------------- --------
Class of Beneficial Owner Ownership (1)(2) Power(2)
Common Charles L. Putnam 194,618(5) 1.6% *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
Common Michael S. Weiss 107,321(6) * *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
Common James T. O'Brien 9,266(7) * *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
Common Richard J. Murphy 9,266(7) * *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
Common John K.A. Prendergast, Ph.D. 51,695(8) * *
Stock c/o Palatin Technologies, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540
Common Lindsay A. Rosenwald, M.D. 4,245,212(9) 31.6% 16.2%
Stock 787 Seventh Avenue
New York, NY 10019
Common RAQ, LLC 1,657,070(10) 13.6% 7.1%
Stock 787 Seventh Avenue
New York, NY 10019
Common Paramount Capital Asset 2,322,159(11) 17.6% 9.1%
Stock Management, Inc.
787 Seventh Avenue
New York, NY 10019
54
<PAGE>
AMOUNT AND
NATURE OF PERCENT PERCENT
TITLE OF NAME AND ADDRESS BENEFICIAL OF OF VOTING
CLASS OF BENEFICIAL OWNER OWNERSHIP (1)(2) CLASS POWER(2)
------- ------------------- ---------------- ----- --------
Common The Aries Trust 1,588,797(12) 12.4% 6.3%
Stock c/o MeesPierson (Cayman)
Limited
P.O. Box 2003
British American Centre,
Phase 3
Dr. Roy's Drive
George Town, Grand Cayman
Common Aries Domestic Fund, L.P. 733,362(13) 5.9% 2.8%
Stock 787 Seventh Avenue
New York, NY 10019
Common Essex Woodlands Health 1,209,677(14) 9.0% 5.2%
Stock Ventures, L.P. Fund III
2170 Buckthorne, Suite 170
The Woodlands, TX 77380
Series A Lindsay A. Rosenwald, M.D. 10,000(15) 7.3% 3.5%
Preferred 787 Seventh Avenue
Stock New York, NY 10019
Series A Paramount Capital Asset 10,000(16) 7.3% 3.5%
Preferred Management, Inc.
Stock 787 Seventh Avenue
New York, NY 10019
Series A Essex Woodlands Health 15,000 10.9% 5.2%
Preferred Ventures, L.P. Fund III
Stock 2170 Buckthorne, Suite 170
The Woodlands, TX 77380
All directors and executive 1,385,576(17) 10.5% 1.5%
officers as a group (eight (8)
persons)
- ------------
*Less than one percent.
55
<PAGE>
(1) With respect to Common Stock, this column includes shares of Common Stock
issuable upon exercise of options or warrants currently exercisable or
exercisable within 60 days following the date of this Prospectus, and
shares of Common Stock issuable upon conversion of Series A Convertible
Preferred Stock. Includes options granted under and subject to stockholder
approval of the 1996 Stock Option Plan which are exercisable within 60 days
following the date of this Prospectus. In the event that the 1996 Stock
Option Plan is not approved, the grant of such options will be void. No
director or officer owns any Series A Preferred Stock. Beneficial ownership
includes direct or indirect voting or investment power. All shares listed
in the table are beneficially owned and sole voting and investment power is
held by the persons named, except as otherwise noted.
(2) The Common Stock has one vote for each share and the Series A Convertible
Preferred Stock has approximately 80.6 votes for each share, subject to
adjustment upon the occurrence of certain events. Voting power is
calculated on the basis of the aggregate of Common Stock and Series A
Convertible Preferred Stock outstanding as of the date of this Prospectus.
On the date of this Prospectus there were 12,164,444 shares of Common
Stock outstanding and 137,780 shares of Series A Convertible Preferred
Stock outstanding, entitled to a maximum of 11,111,208 votes in the
aggregate. In the case of Series A Convertible Preferred Stock voting
separately as a class, voting power is equal to the percent of the class
owned.
(3) Includes (i) 71,878 shares of Common Stock issuable upon exercise of
options granted pursuant to RhoMed's 1995 Employee Incentive Stock Option
Plan, of which options with respect to 47,919 shares of Common Stock are
currently exercisable and options with respect to 23,959 shares of Common
Stock will become exercisable within 60 days following the date of this
Prospectus; (ii) 120,000 shares of Common Stock issuable upon exercise of
options granted pursuant to the 1996 Stock Option Plan (assuming adoption
of the 1996 Stock Option Plan); (iii) 218,730 shares of Common Stock
issuable upon exercise of anti-dilution options granted by the Company, of
which options with respect to 162,664 shares of Common Stock are currently
exercisable and options with respect to 56,066 shares of Common Stock will
become exercisable within 60 days following the date of this Prospectus;
and (iv) 40,429 shares of Common Stock issuable upon exercise of non-plan
options, of which options with respect to 13,476 shares of Common Stock
are currently exercisable and options with respect to 26,953 shares of
Common Stock will become exercisable within 60 days following the date of
this Prospectus. Does not include 748,856 shares of Common Stock issuable
upon exercise of options not exercisable within 60 days following the date
of this Prospectus.
(4) Includes (i) 197,860 shares of Common Stock issuable upon exercise of
currently exercisable options granted pursuant to RhoMed's 1995 Employee
Incentive and Non-Qualified Stock Option Plans; (ii) 60,000 shares of
Common Stock issuable upon exercise of options granted pursuant to the
1996 Stock Option Plan (assuming adoption of the 1996 Stock Option Plan);
and (iii) 35,688 shares of Common Stock issuable upon exercise of non-plan
options. Does not include 170,308 shares of Common Stock issuable upon
exercise of options not exercisable within 60 days following the date of
this Prospectus.
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<PAGE>
(5) Includes (i) 98,930 shares of Common Stock issuable upon exercise of
currently exercisable options granted pursuant to RhoMed's 1995 Employee
Incentive and Non-Qualified Stock Option Plans; (ii) 60,000 shares of
Common Stock issuable upon exercise of options granted pursuant to the
1996 Stock Option Plan (assuming adoption of the 1996 Stock Option Plan);
and (iii) 35,688 shares of Common Stock issuable upon exercise of non-plan
options. Does not include 269,238 shares of Common Stock issuable upon
exercise of options not exercisable within 60 days following the date of
this Prospectus.
(6) Includes (i) 46,353 shares of Common Stock issuable upon exercise of
currently exercisable warrants; and (ii) 9,266 shares of Common Stock
issuable upon exercise of options granted pursuant to the 1996 Stock
Option Plan (assuming adoption of the 1996 Stock Option Plan), of which
options with respect to 4,266 shares of Common Stock are currently
exercisable and options with respect to 5,000 shares of Common Stock will
become exercisable within 60 days following the date of this Prospectus.
Does not include 15,000 shares of Common Stock issuable upon exercise of
options granted pursuant to the Option Plan not exercisable within 60 days
following the date of this Prospectus (assuming adoption of the 1996 Stock
Option Plan).
(7) Represents 9,266 shares of Common Stock issuable upon exercise of options
granted pursuant to the 1996 Stock Option Plan (assuming adoption of the
1996 Stock Option Plan), of which options with respect to 4,266 shares of
Common Stock are currently exercisable and options with respect to 5,000
shares of Common Stock will become exercisable within 60 days following
the date of this Prospectus. Does not include 15,000 shares of Common
Stock issuable upon exercise of options granted pursuant to the Option
Plan not exercisable within 60 days following the date of this Prospectus
(assuming adoption of the 1996 Stock Option Plan).
(8) Includes 5,000 shares of Common Stock issuable upon exercise of options
granted pursuant to the 1996 Stock Option Plan (assuming adoption of the
1996 Stock Option Plan), which will become exercisable within 60 days
following the date of this Prospectus. Does not include 15,000 shares of
Common Stock issuable upon exercise of options granted pursuant to the
Option Plan not exercisable within 60 days following the date of this
Prospectus (assuming adoption of the 1996 Stock Option Plan).
(9) Includes (i) 265,983 shares of Common Stock issuable upon exercise of
currently exercisable warrants held by Dr. Rosenwald; (ii) 1,657,070
shares of Common Stock owned by RAQ, LLC, of which Dr. Rosenwald is
President; (iii) 930,939 shares of Common Stock outstanding and 524,193
shares of Common Stock issuable upon conversion of 6,500 shares of Series
A Convertible Preferred Stock, owned by The Aries Trust, a Cayman Islands
trust ("The Aries Trust"); (iv) 372,757 shares of Common Stock outstanding
and 282,258 shares of Common Stock issuable upon conversion of 3,500
shares of Series A Convertible Preferred Stock, owned by Aries Domestic
Fund, L.P. ("Aries Domestic Fund"); (v) 78,347 shares of Common Stock
issuable upon exercise of currently exercisable warrants held by Aries
Domestic Fund; and (vi) 133,665 shares of Common Stock issuable upon
exercise of currently exercisable warrants held by The Aries Trust. Dr.
Rosenwald shares voting and
57
<PAGE>
investment power as to the foregoing shares. Dr. Rosenwald is the Chairman
of the Board and President of Paramount Capital Asset Management, Inc.,
which is the general partner of Aries Domestic Fund and the investment
manager of The Aries Trust, and as such may be deemed to be the beneficial
owner of shares held by Aries Domestic Fund and The Aries Trust, and may
disclaim beneficial ownership. Does not include (i) any shares of Common
Stock owned by employees of the Placement Agent or Paramount Capital
Investments of which Dr. Rosenwald is the Chairman of the Board and
President; (ii) warrants to purchase 25,000 shares of Common Stock which
are issuable to The Placement Agent or its designees pursuant to a
financial advisory services agreement; or (iii) Preferred Stock Placement
Warrants to purchase 13,778 shares of Series A Convertible Preferred
Stock, convertible into approximately 1,111,129 shares of Common Stock,
which will not be exercisable until November 1997.
(10) RAQ, LLC shares voting and investment power as to these shares. All of the
shares of Common Stock owned by RAQ, LLC are also included in the
beneficial ownership of Lindsay A. Rosenwald, M.D., as explained in note
(9) above.
(11) Includes (i) 930,939 shares of Common Stock outstanding and 524,193 shares
of Common Stock issuable upon conversion of 6,500 shares of Series A
Convertible Preferred Stock, owned by The Aries Trust; (ii) 372,757 shares
of Common Stock outstanding and 282,258 shares of Common Stock issuable
upon conversion of 3,500 shares of Series A Convertible Preferred Stock,
owned by Aries Domestic Fund; (iii) 78,347 shares of Common Stock issuable
upon exercise of currently exercisable warrants held by Aries Domestic
Fund; and (iv) 133,665 shares of Common Stock issuable upon exercise of
currently exercisable warrants held by The Aries Trust. Paramount Capital
Asset Management, Inc. shares voting and investment power as to the
foregoing shares. Paramount Capital Asset Management, Inc. is the general
partner of Aries Domestic Fund and the investment manager of The Aries
Trust, and as such may be deemed to be the beneficial owner of shares held
by Aries Domestic Fund and The Aries Trust, and may disclaim beneficial
ownership. All of the shares owned or purchasable by Paramount Capital
Asset Management, Inc. are also included in the beneficial ownership of
Lindsay A. Rosenwald, M.D., as explained in note (9) above.
(12) Includes (i) 524,193 shares of Common Stock issuable upon conversion of
6,500 shares of Series A Convertible Preferred Stock; and (ii) 133,665
shares of Common Stock issuable upon exercise of currently exercisable
warrants. The Aries Trust shares voting and investment power as to the
foregoing shares. All of the shares owned or purchasable by The Aries
Trust are also included in the beneficial ownership of Lindsay A.
Rosenwald, M.D. and of Paramount Capital Asset Management, Inc., as
explained in notes (9) and (11) above.
(13) Includes (i) 282,258 shares of Common Stock issuable upon conversion of
3,500 shares of Series A Convertible Preferred Stock; and (ii) 78,347
shares of Common Stock issuable upon exercise of currently exercisable
warrants. Aries Domestic Fund shares voting and investment power as to the
foregoing shares. All of the shares owned or purchasable by Aries Domestic
Fund are also included in the beneficial ownership of Lindsay A.
Rosenwald, M.D. and of Paramount Capital Asset Management, Inc., as
explained in notes (9) and (11) above.
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<PAGE>
(14) Represents shares of Common Stock issuable on conversion of 15,000 shares
of Series A Convertible Preferred Stock.
(15) Includes (i) 6,500 shares of Series A Convertible Preferred Stock owned by
The Aries Trust; and (ii) 3,500 shares of Series A Convertible Preferred
Stock owned by Aries Domestic Fund. Dr. Rosenwald shares voting and
investment power as to the foregoing shares. See note (9) above. Does not
include Preferred Stock Placement Warrants to purchase 13,778 shares of
Series A Convertible Preferred Stock, which will not be exercisable until
November 1997.
(16) Includes (i) 6,500 shares of Series A Convertible Preferred Stock owned by
The Aries Trust; and (ii) 3,500 shares of Series A Convertible Preferred
Stock owned by Aries Domestic Fund. Paramount Capital Asset Management,
Inc. shares voting and investment power as to the foregoing shares. See
note (11) above.
(17) Includes 1,048,811 shares of Common Stock issuable on exercise of options
or warrants, of which 921,833 are currently exercisable and 126,978 will
become exercisable within 60 days from the date of this Prospectus. Of the
shares of Common Stock issuable on exercise of options, 252,798 shares of
Common Stock are issuable upon exercise of options granted pursuant to the
1996 Stock Option Plan (assuming adoption of the 1996 Stock Option Plan).
Does not include 1,339,777 shares of Common Stock issuable upon exercise
of options not exercisable within 60 days following the date of this
Prospectus, of which 60,000 are issuable upon exercise of options granted
pursuant to the 1996 Stock Option Plan (assuming stockholders approve the
1996 Stock Option Plan).
CERTAIN TRANSACTIONS
In November 1996, the Company engaged the Placement Agent to act as
exclusive placement agent for the Series A Offering. Mr. Weiss and Dr.
Prendergast, directors of the Company, recused themselves from voting on the
matter, and the Series A Offering was approved by a vote of the disinterested
directors. Mr. Weiss is an officer of the Placement Agent and Paramount Capital
Investments, an affiliate of the Placement Agent, and Dr. Prendergast is
Managing Director of Paramount Capital Investments. As placement agent, the
Placement Agent received a 9% commission, amounting to $1,240,020, and a 4%
non-accountable expense allowance, amounting to $551,120, on the gross proceeds
of the Series A Offering, for an aggregate total of $1,791,140, and Preferred
Stock Placement Warrants to purchase 13,778 shares of Series A Convertible
Preferred Stock, at an exercise price of $110 per share offering price. The
Company also agreed to indemnify the Placement Agent against certain
liabilities, including liabilities arising under the Securities Act, in
connection with the Series A Offering.
Pursuant to the placement agency agreement for the Series A Offering, the
Company entered into an introduction agreement with the Placement Agent (the
"Introduction Agreement"), under which the Placement Agent acts as the Company's
non-exclusive financial advisor for a minimum period of eighteen (18) months
commencing January 1, 1997, and will receive (i) out-of-pocket expenses incurred
in connection with services performed under the Introduction Agreement, (ii) a
retainer of $72,000 and (ii) percentage or lump sum success fees in the event
that the Placement
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<PAGE>
Agent assists the Company in connection with certain financing and strategic
transactions. The Introduction Agreement replaced a similar agreement in effect
from September 1, 1996 through December 31, 1996, pursuant to which the
Placement Agent received a retainer of $5,000 per month and a warrant to
purchase 25,000 shares of Common Stock at $2.25 per share.
Prior to the Merger, the Placement Agent served as placement agent for an
offering of shares of RhoMed common stock (the "RhoMed Common Stock Offering")
authorized by RhoMed's board of directors on March 4, 1996; the RhoMed Class B
Offering authorized by RhoMed's board of directors on November 27, 1995; and the
RhoMed Class A Offering authorized by RhoMed's board of directors on July 28,
1995. In the RhoMed Class A Offering, the RhoMed Class B Offering and the RhoMed
Common Stock Offering, RhoMed paid the Placement Agent commissions and fees of
$90,000, $110,500 and $1,253,902, respectively, and issued warrants to the
Placement Agent to purchase RhoMed common stock, which as a result of the Merger
were converted into warrants to purchase 82,949 shares of Common Stock at $0.05
per share; 7,834 shares of Common Stock at $1.63 per share; and 711,184 shares
of Common Stock at $1.63 per share, respectively.
Effective April 1995, RhoMed entered into a letter of intent with Castle
Group under which (i) Castle Group agreed to arrange for a line of credit of up
to $300,000 to finance ongoing operations of RhoMed; (ii) Castle Group agreed to
arrange for future financings for RhoMed; and (iii) RhoMed agreed to sell to
Castle Group or its designees, for nominal consideration, 4,000,000 shares of
RhoMed Series A Convertible Preferred Stock. This resulted, at the time of the
investment, in Castle Group and affiliates of Castle Group obtaining majority
ownership and control of RhoMed. Castle Group is owned by Lindsay A. Rosenwald,
M.D., and is under common control with the Placement Agent. Pursuant to the
letter of intent, RhoMed borrowed the maximum amount, and paid off the line of
credit in full in September 1995. The average interest rate for the line of
credit was 10.90% and the total interest paid was $8,005.
On July 24, 1995, Michael S. Weiss and Carl Spana, Ph.D., were appointed
to the board of directors of RhoMed. Dr. Spana was an employee of Paramount
Capital Investments at the time of his appointment to RhoMed's board of
directors. The RhoMed Class A Offering was ratified by disinterested
stockholders of RhoMed on August 15, 1995; the RhoMed Class B Offering was
approved by disinterested directors with Mr. Weiss and Dr. Spana abstaining; and
the placement agent for the RhoMed Common Stock Offering was selected by an
offering committee of RhoMed's board of directors, consisting of disinterested
directors.
As a result of the RhoMed offerings described above, Dr. Rosenwald, Mr.
Weiss, and Dr. Spana received equity securities of the Company in the following
amounts: Dr. Rosenwald received warrants to purchase 60,319 shares of Common
Stock at $0.05 per share and warrants to purchase 205,664 shares of Common Stock
at $1.63 per share; RAQ, LLC, a company controlled by Dr. Rosenwald, received
1,657,070 shares of Common Stock; Mr. Weiss received 51,702 shares of Common
Stock, warrants to purchase 5,858 shares of Common Stock at $0.05 per share and
warrants to purchase 40,495 shares of Common Stock at $1.63 per share; and Dr.
Spana received 46,695 shares of Common Stock.
Dr. Rosenwald is the president and sole stockholder of Paramount Capital
Asset Management, Inc., the general partner of Aries Domestic Fund and
investment manager of The Aries Trust
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(together, the "Aries Entities"). The Aries Entities taken together purchased
the following equity securities: 10,000 shares of Series A Convertible Preferred
Stock, convertible into 806,451 shares of Common Stock, 1,290,696 shares of
Common Stock, warrants to purchase 18,433 shares of Common Stock at $.68 per
share, and warrants to purchase 55,299 shares of Common Stock at $.05 per share.
Following the RhoMed Common Stock Offering, the Placement Agent assigned to the
Aries Entities those portions of the Placement Agent's placement agent warrants
attributable to the Common Stock purchases of the Aries Entities, consisting of
warrants to purchase 129,068 shares of Common Stock at $1.63 per share.
Mr. Quilty, Dr. Spana, Mr. Putnam and Non-Employee Directors have been
granted options to purchase Common Stock. See "Management," "Executive
Compensation" and "Principal Stockholders."
Buck A. Rhodes, Ph.D. was a director of RhoMed from inception until June
30, 1996, was President of RhoMed from inception until March 7, 1996, and was a
director of the Company from June 25, 1996 through June 30, 1996. Under a
consulting agreement dated March 7, 1996 between Dr. Rhodes and RhoMed, Dr.
Rhodes was paid $51,023 in accrued salary and $36,000 as severance compensation
for resigning from the board of RhoMed, and is being paid $6,833 per month from
April 1996 through March 1998 for consulting services.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 25,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock. The Board of Directors has adopted and
submitted to stockholders for approval at the special meeting of stockholders
scheduled for August 21, 1997 (the "Special Meeting"), amendments to the
Company's Certificate of Incorporation which would (i) increase the authorized
shares of Common Stock to 75,000,000 shares and the authorized shares of
Preferred Stock to 10,000,000 shares; and (ii) effect a reverse stock split of
the Common Stock (such split to combine a number of outstanding shares of Common
Stock between two (2) and four (4), such number consisting of only whole shares
and tenths of shares, into one (1) share of common stock), depending upon a
determination by the Board of Directors that such a reverse stock split is in
the best interests of the Company and its stockholders, and authorize the Board
of Directors to file one such amendment prior to December 31, 1997. The Board of
Directors has also adopted and submitted to stockholders for approval at the
Special Meeting the 1996 Stock Option Plan which authorizes the Company to issue
stock options for up to 2,500,000 shares of Common Stock (of which options to
purchase 739,798 shares have previously been granted subject to stockholder
approval of the 1996 Stock Option Plan).
COMMON STOCK
As of the date of this Prospectus, there are 12,164,444 shares of Common
Stock outstanding, and a maximum of 16,549,857 shares of Common Stock issuable
on conversion or exercise of securities convertible into or exercisable for
Common Stock. Holders of Common Stock have one vote per share and have no
preemption rights. Holders of Common Stock have the right to participate ratably
in all distributions, whether of dividends or assets in liquidation, dissolution
or
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<PAGE>
winding up, subject to any superior rights of holders of Preferred Stock
outstanding at the time. See "Preferred Stock" and "Series A Convertible
Preferred Stock."
PREFERRED STOCK
The Board of Directors has the right, without the consent of holders of
Common Stock, to designate and issue one or more series of Preferred Stock,
which may be convertible into Common Stock at a ratio determined by the Board of
Directors, and which may bear rights superior to Common Stock as to voting,
dividends, redemption, distributions in liquidation, dissolution, or winding up,
and other relative rights and preferences. The issuance of a series of Preferred
Stock in response to an attempt to change control of the Company could have the
effect of delaying, deferring or preventing the change in control. The holders
of the Series A Convertible Preferred Stock have special voting rights
(described below) which could have the effect of delaying, deferring or
preventing a change in control without the consent of two-thirds of the holders
of Series A Convertible Preferred Stock then outstanding.
SERIES A CONVERTIBLE PREFERRED STOCK
The Board of Directors has established one series of 264,000 shares of
Preferred Stock, the Series A Convertible Preferred Stock, of which 137,780
shares are outstanding and 13,778 shares are issuable upon exercise of the
Preferred Stock Placement Warrants. The Series A Convertible Preferred Stock has
the rights and preferences set forth below.
OPTIONAL CONVERSION. Each share of Series A Convertible Preferred Stock is
convertible at any time, at the option of the holder, into the number of shares
of Common Stock equal to $100 divided by the "Conversion Price" (as defined in
the Certificate of Designations for the Series A Convertible Preferred Stock).
The current Conversion Price is $1.24, so each share of Series A Convertible
Preferred Stock is currently convertible into approximately 80.6 shares of
Common Stock (fractional shares will be cashed out on conversion, and do not
vote). The Conversion Price is subject to adjustment. As of the date of this
Prospectus, no holder has converted any Series A Convertible Preferred Stock.
MANDATORY CONVERSION. Commencing May 9, 1998, the Company may, at its
option, cause the conversion of the Series A Convertible Preferred Stock, in
whole or in part, on a pro rata basis, into Common Stock at the conversion rate
in effect at that time, if the closing bid price of the Common Stock has
exceeded 200% of the then applicable Conversion Price for at least twenty (20)
trading days in any thirty (30) consecutive trading day period ending three (3)
days prior to the date of conversion.
ADJUSTMENTS TO THE CONVERSION PRICE. The Conversion Price is subject to
adjustment, under certain circumstances, upon the sale or issuance of Common
Stock for consideration per share less than either (i) the Conversion Price in
effect on the date of such sale or issuance, or (ii) the market price of the
Common Stock as of the date of such sale or issuance. The Conversion Price is
also subject to adjustment upon the occurrence of a merger, reorganization,
consolidation, reclassification, stock dividend or stock split which will result
in an increase or decrease in the number of shares of Common Stock outstanding.
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<PAGE>
CONVERSION PRICE RESET EVENT. The Conversion Price is subject to
adjustment on May 9, 1998 (the "Reset Date") if the average closing bid price of
the Common Stock for the thirty (30) consecutive trading days immediately
preceding the Reset Date (the "Reset Trading Price") is less than 130% of the
then applicable Conversion Price (a "Reset Event"). Upon a Reset Event, the
Conversion Price will be reduced to greater of (i) the Reset Trading Price
divided by 1.3 or (ii) 50% of the Conversion Price in effect before the Reset
Event.
REPURCHASE OR CASH-OUT OPTION. In the event that the Company has not, by
February 3, 1998, authorized a sufficient number of shares of Common Stock to
permit conversion in full of all outstanding Series A Convertible Preferred
Stock, then each holder will be entitled, at the holder's option, to require the
Company to repurchase the holder's shares of Series A Convertible Preferred
Stock at $100 per share. In the event that on the date when a holder elects to
convert, the Company has not authorized a sufficient number of shares of Common
Stock to permit conversion in full of the holder's Series A Convertible
Preferred Stock, then the holder will be entitled, at the holder's option, to
receive the fair market value per share of Common Stock which the holder would
have received, if the Company had authorized sufficient Common Stock to permit
the conversion.
DIVIDEND AND DISTRIBUTION PREFERENCE. The Company may not pay a dividend
or make any distribution to holders of any other capital stock of the Company
unless and until the Company first pays a special dividend or distribution of
$100 per share to the holders of Series A Convertible Preferred Stock, and
unless holders of two-thirds of the Series A Convertible Preferred Stock approve
the dividend.
LIQUIDATION PREFERENCE. Upon (i) a liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, (ii) a sale or other
disposition of all or substantially all of the assets of the Company, or (iii)
any consolidation, merger, combination, reorganization or other transaction in
which the Company is not the surviving entity or in which the shares of Common
Stock constituting in excess of 50% of the voting power of the Company are
exchanged for or changed into other stock or securities, cash and/or any other
property, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of Series A Convertible Preferred Stock
then outstanding will first be entitled to receive, pro rata and in preference
to the holders of any other capital stock, an amount per share equal to $100
plus accrued but unpaid dividends, if any.
VOTING RIGHTS. Each holder of Series A Convertible Preferred Stock has the
number of votes equal to the number of shares of Common Stock issuable upon
conversion of the holder's Series A Convertible Preferred Stock at the record
date for determination of the stockholders entitled to vote or, if no record
date is established, at the date a vote is taken. So long as a majority of the
Series A Convertible Preferred Stock outstanding as of May 9, 1997 and issuable
upon exercise of the Placement Agent's Warrants remain outstanding or issuable,
the approval of holders of 66-2/3% of the Series A Convertible Preferred Stock
then outstanding is required for (i) any alteration of the Company's charter
documents or bylaws that would adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the Series A
Convertible Preferred Stock; (ii) the declaration or payment of any dividend on
any other securities or the repurchase of any securities of the Company other
than the Series A Convertible Preferred Stock; and (iii) authorization or
issuance, or increase the authorized amount of, any security ranking prior to
the Series A Convertible Preferred
63
<PAGE>
Stock as to liquidation, payment of dividends or distributions or voting rights.
Except as provided above or as required by applicable law, the holders of the
Series A Convertible Preferred Stock will be entitled to vote together with the
holders of the Common Stock and not as a separate class.
PREFERRED STOCK PLACEMENT WARRANTS
Pursuant to a Placement Agency Agreement, dated as of November 15, 1996,
between the Company and the Placement Agent, the Company has issued Preferred
Stock Placement Warrants to the Placement Agent. See "Selling Stockholders" and
"Certain Transactions." The Preferred Stock Placement Warrants are exercisable
for a period of five (5) years commencing in November 1997, at a price of $110
per share of Series A Convertible Preferred Stock (110% of the offering price
per share for the Series A Convertible Preferred Stock). The Preferred Stock
Placement Warrants contain a cashless exercise feature and anti-dilution
provisions. As of the date of this Prospectus, no holder has exercised any
Preferred Stock Placement Warrants.
COMMON STOCK PLACEMENT WARRANTS
Pursuant to a Placement Agency Agreement, dated as of March 5, 1996,
between the Company and the Placement Agent, the Company has issued Common Stock
Placement Warrants to designees of the Placement Agent. See "Selling
Stockholders" and "Certain Transactions." The Common Stock Placement Warrants
are exercisable until June 25, 2006 at a price of approximately $1.6275 per
share of Common Stock. The Common Stock Placement Warrants contain a cashless
exercise feature and anti-dilution provisions. As of the date of this
Prospectus, no holder has exercised any Common Stock Placement Warrants.
CLASS C WARRANTS
In connection with the Merger, RhoMed issued Class C Warrants, primarily
to pre-Merger directors and officers of the Company. See "Selling Stockholders."
Pursuant to the Merger, the Class C Warrants became exercisable for Common
Stock. The Class C Warrants are exercisable until June 24, 2000, at an exercise
price of approximately $2.1699 per share. The Class C Warrants contain
anti-dilution provisions and a call provision. As of the date of this
Prospectus, no holder has exercised any Class C Warrants.
CLASS B WARRANTS
RhoMed issued Class B Warrants in a private offering in 1995 and 1996.
Pursuant to the Merger, the Class B Warrants became exercisable for Common
Stock. The Class B Warrants are exercisable for ten years from the date of issue
(between December 8, 1995 and February 15, 1996), at an exercise price of
approximately $0.6781 per share of Common Stock. The Class B Warrants contain
anti-dilution provisions and are subject to early termination under certain
circumstances. As of the date of this Prospectus, no holder has exercised any
Class B Warrants.
CLASS B PLACEMENT WARRANTS
Pursuant to a Placement Agency Agreement, dated as of December 8, 1995,
between RhoMed and the Placement Agent, RhoMed issued Class B Placement Warrants
to designees of the Placement Agent. See "Selling Stockholders" and "Certain
Transactions." Pursuant to the Merger,
64
<PAGE>
the Class B Placement Warrants became exercisable for Common Stock. The Class B
Placement Warrants are exercisable until February 15, 2006 at an exercise price
of approximately $1.6275 per share of Common Stock. The Class B Placement
Warrants contain a cashless exercise feature and anti-dilution provisions. As of
the date of this Prospectus, no holder has exercised any Class B Placement
Warrants.
CLASS A WARRANTS
RhoMed issued Class A Warrants in a private offering in 1995. Pursuant to
the Merger, the Class A Warrants became exercisable for Common Stock. The Class
A Warrants are exercisable for ten years from the date of issue (between August
10, 1995 and September 13, 1995), at an exercise price of approximately $0.0542
per share of Common Stock. The Class A Warrants contain anti-dilution
provisions. As of the date of this Prospectus, the Company has issued 179,218
shares of Common Stock on exercise of Class A Warrants.
CLASS A PLACEMENT WARRANTS
Pursuant to a Placement Agency Agreement, dated as of July 1, 1995,
between RhoMed and the Placement Agent, RhoMed issued Class A Placement Warrants
to designees of the Placement Agent. See "Selling Stockholders" and "Certain
Transactions." Pursuant to the Merger, the Class A Placement Warrants became
exercisable for Common Stock. The Class A Placement Warrants are exercisable
until September 13, 2005, at an exercise price of approximately $0.0542 per
share of Common Stock. The Class A Placement Warrants contain a cashless
exercise feature and anti-dilution provisions. As of the date of this
Prospectus, no holder has exercised any Class A Placement Warrants.
OTHER SECURITIES
In addition to the securities described above, which include the Offered
Shares and all securities convertible into or exercisable for the Offered
Shares, as of the date of this Prospectus, the Company has outstanding options
and warrants (not all of which are currently exercisable) to purchase an
aggregate of 3,408,366 shares of Common Stock, at prices ranging from $.05 per
share to $70.00 per share, and expiration dates ranging from December 30, 1997
to June 3, 2007. For an enumeration of certain outstanding options and warrants,
see Note (10), "Stockholders' Equity (Deficit)," to the Company's audited
financial statements which accompany this Prospectus. Certain of the Company's
outstanding warrants and Common Stock underlying options granted pursuant to Mr.
Quilty's employment agreement have demand or piggy-back registration rights. See
"Executive Compensation."
SELLING STOCKHOLDERS
This Prospectus offers the Offered Shares for resale by Selling
Stockholders who have acquired or will acquire Common Stock on conversion of
Series A Convertible Preferred Stock (including Series A Convertible Preferred
Stock acquired on exercise of Preferred Stock Placement Warrants); on exercise
of Common Stock Placement Warrants, Class C Warrants, Class B Warrants, Class B
Placement Warrants, Class A Warrants, and Class A Placement Warrants; or issued
by the
65
<PAGE>
Company to pay accrued interest. As of the date of this Prospectus, no holder
has converted any Series A Convertible Preferred Stock or exercised any
Preferred Stock Placement Warrants, Common Stock Placement Warrants, Class C
Warrants, Class B Warrants, Class B Placement Warrants, or Class A Placement
Warrants. See "Prospectus Summary -- The Offering."
The following table sets forth (i) the name of each Selling Stockholder,
(ii) the number of shares of Common Stock (including Common Stock issuable on
conversion of Series A Convertible Preferred Stock at the current conversion
price, and on exercise of all Class C Warrants and Common Stock Placement
Warrants) which each holder owned before the Offering, (iii) the number of
shares in each category being offered for each holder's account, and (iv) the
number and percentage of shares of Common Stock which each holder will own
following the completion of the Offering (assuming the sale of all stock offered
and no other dispositions or acquisitions of Common Stock). Except as noted, no
Selling Stockholder has, within the past three years, had any position, office
or other material relationship with the Company or any of the Company's
predecessors or affiliates. Due to lock-up agreements, not all of the Common
Stock listed below as being offered is available for sale as of the date of this
Prospectus. See "Plan of Distribution -- Lock-Up Agreements."
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
103336 Canada, Inc. 24,193 24,193 0 *
Abeshouse, Mark 13,271 13,271 0 *
Adams, Leonard J. 40,322 40,322 0 *
Advanced Diagnostic Center PA Profit 8,064 8,064 0 *
Sharing Plan #1
Albanese, Sal & Lorraine 28,225 28,225 0 *
Amore Perpetuo, Inc. 40,322 40,322 0 *
Amram Kass, P.C., Defined Benefit 1,843 1,843 0 *
Pension Plan
Andrade, Michael L. and Sherry R. 20,161 20,161 0 *
Andrade, Co-TTees. of M&S
Andrade Rev. Tr.
Andrade Enterprises, LLC 80,645 80,645 0 *
Angelsastro, Philip J. 20,161 20,161 0 *
Anthony G. Polak IRA Ret. Acct., 20,161 20,161 0 *
Cowen & Co. cust.
Appel, Marc 28,225 28,225 0 *
Aries Domestic Fund, L.P. (1) 360,605 360,605
Aries Trust, The (1) 657,858 657,858
Aristizabal, Mario 40,322 40,322 0 *
Armen Partners, L.P. 78,916 78,916 *
Armen Partners Offshore Fund, Ltd. 141,129 141,129
Arneson, Harriet E. 20,161 20,161 0 *
- ------------------------------
* indicates less than one percent
66
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Ashton, Billington (2) 2,073 2,073 0 *
Austost Anstalt Schaan 201,612 201,612 0 *
Bahl, Rajiv 20,161 20,161 0 *
Berlinger, Michael A. & Martin, 20,161 20,161 0 *
Geraldine F.
Bernstein, Lawrence 8,064 8,064 0 *
Bioquest Venture Leasing Part. LP (3) 255,641 255,641
Birbrower, Barry, P.C. Profit Sharing 20,161 20,161 0 *
Trust
Blake, Simon A. & Nadine 4,032 4,032 0 *
Boyle, Kevin E. 40,322 40,322 0 *
Brapo Associates 20,161 20,161 0 *
Bridgewater Partners, L.P. 40,322 40,322 0 *
C.S.L. Associates, L.P. 80,645 80,645 0 *
Calvillo, M. Rafael Gonzalez 20,161 20,161 0 *
Cambrian Investments Limited 20,161 20,161 0 *
Partnership
Cass & Co. - Magnum Capital Growth 80,645 80,645 0 *
Fund
Cassidy, Thomas L., IRA Rollover 40,322 40,322 0 *
Chanin, Richard B., IRA f/b/o, DLJSC 40,322 40,322 0 *
as custodian
Chasanoff, Ted, IRA, Cowen & Co. 20,161 20,161 0 *
cust.
Childs, Richard L. 10,080 10,080 0 *
Cinco De Mayo, Ltd. (4) 18,433 18,433 *
Clarke, Kevin, Cowen & Co. Cust. for 20,161 20,161 0 *
IRA
Cohen, Alice & Arthur 20,161 20,161 0 *
Conrads, Robert J. 40,322 40,322 0 *
Cox, Jr., Archibald 161,290 161,290 0 *
Curran, John P. 20,161 20,161 0 *
Darienzo, Ralph A. & Lillian M. 20,161 20,161 0 *
Darling, Michael and Mary 40,322 40,322 0 *
Delaware Charter Guarantee & Trust 4,608 4,608 0 *
Company, TTEE FBO Jack Polak
Profit Sharing Plan
Dishal, Stephanie 8,064 8,064 0 *
Domaco Venture Capital Fund 24,769 24,769 0 *
Dulman, David 20,161 20,161 0 *
- ------------------------------
* indicates less than one percent
67
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Dworetzky, Norma 40,322 40,322 0 *
Dworetzky, Edward 40,322 40,322 0 *
Ecker, Warren S. 20,161 20,161 0 *
Edelman, Joseph (2) 13,087 13,087 0 *
EDJ Limited 80,645 80,645 0 *
Essex Woodlands Health Ventures, 1,209,677 1,209,677
L.P. Fund III
Fabiani, Joseph A. and Theresa M. 13,824 13,824 0 *
Fabiani, JTWROS
Fairway Technology Inc. 40,322 40,322 0 *
Faisal Finance (Switzerland) S.A. 161,290 161,290 0 *
Farber, S. Edmond 2,304 2,304 0 *
Farber, S. Edmond "S" 20,161 20,161 0 *
Finke, Malcolm K., Trustee, Malcolm 13,824 13,824 0 *
K. Finke Trust Dated 8-9-89
Fishbane, Jordan 6,912 6,912 0 *
Franzblau, William I. (5) 50,691 50,691 *
Fricke, F. G. 20,161 20,161 0 *
Fried, Jr., Albert 322,580 322,580 0 *
Garfinkel, Shelley 40,322 40,322 0 *
Gaynes, Davis & Barbara 20,161 20,161 0 *
Gehring III, Francis 40,322 40,322 0 *
Geiss, Dale M. 20,161 20,161 0 *
Gerace, Anthony J. 32,833 32,833 0 *
GHA Management 9,216 9,216 0 *
Giamanco, Joseph 40,322 40,322 0 *
Giant Trading Inc. 80,645 80,645 0 *
Gold, Laura 20,161 20,161 0 *
Goldberg, Arthur 12,096 12,096 0 *
Gomez, Ofelia Anton 20,161 20,161 0 *
Gonzalez M., Roberto 20,161 20,161 0 *
Goodman, Frank 8,064 8,064 0 *
Gordon, Robert P. 40,322 40,322 0 *
Gordon, Michael J. 20,161 20,161 0 *
Gross, John & Francine 20,161 20,161 0 *
Gross, Bernard (2) 2,810 2,810 0 *
Grossman, Andrew P., IRA, Cowen & 20,161 20,161 0 *
Co. cust.
Grossman Family Trust 20,161 20,161 0 *
- ------------------------------
* indicates less than one percent
68
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Harari, Chaya & Sherri 20,161 20,161 0 *
Harrigan Family Trust 20,161 20,161 0 *
Heely, Laurence S. 8,064 8,064 0 *
Heiser, Thomas P. & Mary E. 24,769 24,769 0 *
Heymann, Jerry 20,161 20,161 0 *
Hickey, Joseph 24,193 24,193 0 *
Hight, Joan 4,608 4,608 0 *
Hight, Randall W. 20,161 20,161 0 *
Hight, Norton F. 20,161 20,161 0 *
Hirschfield, Jack 10,080 10,080 0 *
Hughes, Mary Jo 60,483 60,483 0 *
J.F. Shea Co., Inc. as Nominee 1997-5 403,225 403,225 0 *
J.M. Hull Associates, LP 161,290 161,290 0 *
Jackson Hole Investment Acquisition 27,649 27,649 0 *
L.P.
JDK Partners, LP 80,645 80,645 0 *
Johnson, Christopher A. & Hilary L. 4,032 4,032 0 *
Joyce, Michael 20,161 20,161 0 *
Kane, Patrick M. 40,322 40,322 0 *
Kash, Peter (6) 56,649 56,649 0 *
Kass, Amram, P.C. Defined Benefit 80,645 80,645 0 *
Pension Plan
Katzmann, Scott (2) 64,617 64,617 0 *
Kelly, Edward Justin 44,930 44,930 0 *
Kendall, Jr., Donald R. 20,161 20,161 0 *
Kennedy, John R. 40,322 40,322 0 *
Kessel, Daniel, M.D. 13,824 13,824 0 *
Kessel, Lawrence J. 13,824 13,824 0 *
Keys Foundation, Curacao, 161,290 161,290 0 *
Netherlands Antilles
Knox, John 2,073 2,073 0 *
Knox, James & Farideh 16,129 16,129 0 *
Kohut, Richard 20,161 20,161 0 *
Korniewicz, Frederick J. 20,161 20,161 0 *
Korovin, M.D., Gwen S. 20,161 20,161 0 *
Kotel, Ira L. 16,129 16,129 0 *
Lanteri, Vincent J. and Susan E. 28,225 28,225 0 *
LaRosa, Joseph A. 20,161 20,161 0 *
- ------------------------------
* indicates less than one percent
69
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Laura Gold Galleries Ltd. Profit 20,161 20,161 0 *
Sharing Trust
Lavin, James F. 13,824 13,824 0 *
Lazar, Ronald, Cowen & Co. Cust. for 20,161 20,161 0 *
IRA
Lazar, Ronald M. and Barbra A. 2,304 2,304 0 *
Lazar, JTWROS
Leaf, Robert J. 40,322 40,322 0 *
Lemer, Albert 20,161 20,161 0 *
Lenchner, Gregory S., M.D. 13,824 13,824 0 *
Lenz, Herman & Muriel Lenz, Co- 20,161 20,161 0 *
Ttee, The Lenz Family Trust
Levine, Jeffrey (2) 115 115 0 *
Levine, Jerry 20,161 20,161 0 *
Lieberman, Henry N. 20,161 20,161 0 *
Linton Lake, S.A. 27,649 27,649 0 *
Lion Tower Corporation 120,967 120,967 0 *
Lipman, Donna and Lawrence 20,161 20,161 0 *
Lipton, Maria C. 8,064 8,064 0 *
Livas, Alfredo 22,580 22,580 0 *
Loeb, Jr., John L. 20,161 20,161 0 *
Loeser, Dennis C & Van Genen 20,161 20,161 0 *
Beheer B.V.
Lowrie Management Ltd. 20,161 20,161 0 *
Lydon, Jr., Harris R. L. 20,161 20,161 0 *
Mancinelli, Gene T. 80,645 80,645 0 *
Masada I Limited Partnership 40,322 40,322 0 *
MBS Investors 60,483 60,483 0 *
McCurdy, Stephen B. and Catherine 20,161 20,161 0 *
R.
McDermott, Stephen 1,958 1,958 0 *
McInerney, Tim (2) 130,987 130,987 0 *
McManus, Kevin T. 20,161 20,161 0 *
McNiff, John P. 120,967 120,967 0 *
Metzger, William H., M.D. Inc. 20,161 20,161 0 *
Retirement Plan
Millman, Paul M. 20,161 20,161 0 *
Milstein, Albert 85,253 85,253 0 *
Model, Wolfe F., IRA, Cowen & Co. 20,161 20,161 0 *
custodian
- ------------------------------
* indicates less than one percent
70
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Morgan, Alfred D. 20,161 20,161 0 *
Moskowitz, Reed 20,161 20,161 0 *
Moslow, Morton & Rusty 8,064 8,064 0 *
Motschwiller, Donald and Amy 20,161 20,161 0 *
Mullen, Michael A. 20,161 20,161 0 *
Nagle, Arthur J. 20,161 20,161 0 *
Natiello, Joseph A. 80,645 80,645 0 *
Nebenzahl, Mechie 24,193 24,193 0 *
Netter, Drew M. 20,161 20,161 0 *
Omicron Investment Corporation 80,645 80,645 0 *
Osterweis, John S., Trustee for the 20,161 20,161 0 *
Osterweis Revocable Trust
Ostrovsky, Steven N. 40,322 40,322 0 *
Ostrovsky, Paul D. & Rebecca L. 10,080 10,080 0 *
P. A. W. Offshore Fund, Ltd. 403,225 403,225 0 *
Palmetto Partners, Ltd. 161,290 161,290 0 *
Paramount Capital, Inc. (7) 1,111,129 1,111,129
Pashayan, Richard 20,161 20,161 0 *
Perkins, Pat O., Ttee, Perkins Family 20,161 20,161 0 *
Trust
Persky, Mr. & Mrs. Bill 20,161 20,161 0 *
Pesonen, Mark D. 40,322 40,322 0 *
Peterson, William & Catherine 20,161 20,161 0 *
Plancarte G.N., Carlos & Leonore P. 40,322 40,322 0 *
De Marvan
Polak, Jack, Keogh Profit Sharing Plan 20,161 20,161 0 *
Polak, Frederick B. "S" 20,161 20,161 0 *
Polak, Anthony G., "S" 4,608 4,608 0 *
Polak, Anthony G. 4,608 4,608 0 *
Pollak, Richard 9,216 9,216 0 *
Pomper, Stuart & Ingrid 80,645 80,645 0 *
Pomper, Stanley 80,645 80,645 0 *
Pomper, Alexander 161,290 161,290 0 *
Porter Partners, L.P. 241,935 241,935 0 *
Prager, Tis 40,322 40,322 0 *
Ramirez, Elke R. De 12,672 12,672 0 *
Re, Charles, Cowen & Co. Custodian, 20,161 20,161 0 *
Keogh Profit Sharing Plan
Rebecca 1969 Trust 110,599 110,599 0 *
- ------------------------------
* indicates less than one percent
71
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
REDLIW Corp. 55,299 55,299 0 *
Reinharz, Jehuda 20,161 20,161 0 *
Richmond, Michael 32,258 32,258 0 *
RL Capital Partners 69,699 69,699 0 *
Rodriguez Perez, Raimundo & Anelies 40,322 40,322 0 *
H. Huter de R.
Roffer, Marion 40,322 40,322 0 *
Rosenwald, Lindsay A. (8) 265,983 265,983
Rothschild, Jonathan E. 49,538 49,538 0 *
Rubin, Wayne L. (9) 44,709 44,709 0 *
Rudick, Joseph (2) 23,502 23,502 0 *
Rudolf, Richard G. 40,322 40,322 0 *
Ruggeberg, Karl (1) 92 92 0 *
Ruttenberg, David W. 20,161 20,161 0 *
Ruyan, Jerry L. 27,649 27,649 0 *
Saker, Wayne 40,322 40,322 0 *
Salvi, Emilio S. 20,161 20,161 0 *
Sanger Investments 16,129 16,129 0 *
Schaeffer, Harold & Bess 20,161 20,161 0 *
Schlotterbeck, Robert 20,161 20,161 0 *
Schneider, Joel & Jane 20,161 20,161 0 *
Schonzeit, Andrew W. 13,824 13,824 0 *
Schottenfeld Associates 40,322 40,322 0 *
Schwartz, Carl F. 20,161 20,161 0 *
Serbin, Richard and Kathe Serbin, 9,216 9,216 0 *
JTWROS
Shapiro, Robert & Sandra 20,161 20,161 0 *
Sherrill, H. Virgil 41,474 41,474 0 *
Siegel, Andrew J. 20,161 20,161 0 *
Slovin, Bruce 27,649 27,649 0 *
Smeriglio, Michael J. & Geraldine Z. 20,161 20,161 0 *
Smithson Ventures Money Purchase 40,322 40,322 0 *
Pension Plan, DLJ custodian
Solano, Jr., James J. 20,161 20,161 0 *
Solloway, William J. 8,064 8,064 0 *
Solomon, Philip 20,161 20,161 0 *
Spana, Carl A. (10) 20,161 20,161 0 *
- ------------------------------
* indicates less than one percent
72
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Spint, Robert L., Trust UA DTD 20,161 20,161 0 *
10/19/89, Robert L. Spint,
Trustee
Stadtmauer, Rabbi Murray & Clare 20,161 20,161 0 *
Stern, Andrea 20,161 20,161 0 *
Steven Lamm, M.D., Retirement Fund 20,161 20,161 0 *
Stevens-Knox & Associates, Inc. 101,382 101,382 0 *
Strassman, Richard 20,161 20,161 0 *
Strassman, Joseph & Barbara 282,258 282,258 0 *
Suan Investments 55,299 55,299 0 *
Suppa, Enrico F. 20,161 20,161 0 *
Sutel, Saul, Ind. Ret Acct., Cowen & 20,161 20,161 0 *
Co. Cust.
T. Soep #2 Trust FBO Catharina 20,161 20,161 0 *
Polak, Jack Polak, Trustee
Taub, Hindy 13,824 13,824 0 *
Teitelbaum, Menashe 10,080 10,080 0 *
Teitelbaum, M.D., Myron M. 20,161 20,161 0 *
Token House Trading Company 80,645 80,645 0 *
Limited
UFH Endowment Ltd. 201,612 201,612 0 *
Umbach, Joseph A. 40,322 40,322 0 *
Uram, Jack 20,161 20,161 0 *
Valori Associates, Inc. 20,161 20,161 0 *
Vinson, Donald E. & Virginia V., 20,161 20,161 0 *
Trust
Vitan Group, L.L.C. 20,161 20,161 0 *
Vitols, J. 40,322 40,322 0 *
Vivaldi, Ltd. (11) 152,074 152,074
Walko, Mark & Sally Lynn 20,161 20,161 0 *
Walko, Mark 2,764 2,764 0 *
Waring, Saul 20,161 20,161 0 *
Weinberg, Matthew F. 20,161 20,161 0 *
Weiner, Arlene 20,161 20,161 0 *
Weinstein, Marshall 13,824 13,824 0 *
Weiss, Michael S. (12) 46,353 46,353 *
Wertheimer, Samuel P. and Pamela B. 13,824 13,824 0 *
Rosenthal, JTWROS
Whetten, Robert J. 120,967 120,967 0 *
Wiencek, John R. 16,129 16,129 0 *
- ------------------------------
* indicates less than one percent
73
<PAGE>
SHARES OF SHARES OF PERCENT
COMMON COMMON OF COMMON
STOCK STOCK STOCK
OWNED OR OWNED OR OWNED OR
ISSUABLE ISSUABLE ISSUABLE
BEFORE OFFERED AFTER AFTER
NAME OF SELLING STOCKHOLDER OFFERING SHARES OFFERING OFFERING
- --------------------------------- ------------ ----------- ----------- ---------
Willett, William H. 40,322 40,322 0 *
Williamson, Robert and Caroline 40,322 40,322 0 *
Winans, Tim 8,064 8,064 0 *
Wrubel, Michael J. 20,161 20,161 0 *
Young, Jonathan M. 9,216 9,216 0 *
Young, Jonathan M. & Lyudmila 40,322 40,322 0 *
Yud, Yoseph 4,608 4,608 0 *
Zapco Holdings, Inc. Deferred 80,645 80,645 0 *
Compensation Plan Trust
Zuck, Alfred C. 20,161 20,161 0 *
Zuck, Vilma B., Irrevocable Trust 20,161 20,161 0 *
FBO Alfred Zuck & other
persons, Randall Zuck &
Paul Millman Ttees DTD
12/28/87
Zucker, Uzi 13,824 13,824 0 *
- -------------------------
(1) Aries Domestic Fund L.P. and The Aries Trust share voting and investment
power as to their shares with Lindsay A. Rosenwald, M.D. and Paramount
Capital Asset Management, Inc. See notes (9), (11), (12), (13), (15) and
(16) to the table in "Principal Stockholders," and "Certain Transactions."
(2) Employees, salespersons or other affiliates of the Placement Agent.
(3) Bioquest Venture Leasing Partnership L.P. is an affiliate of Aberlyn
Holding Co., Inc., which is, with its affiliates, the Company's largest
creditor. See note (6), "Long-Term Financing," to the Company's audited
financial statements which accompany this Prospectus.
(4) Robert G. Rehme, President of Cinco De Mayo, Ltd., was a director of the
Company before the Merger.
(5) William I. Franzblau was a director and chief executive officer of the
Company before the Merger.
(6) Peter M. Kash is a Senior Managing Director of the Placement Agent.
(7) Lindsay A. Rosenwald, M.D. is the Chairman of the Board and President of
the Placement Agent. See note (9) to the table in "Principal
Stockholders," and "Certain Transactions."
(8) Lindsay A. Rosenwald, M.D., is Chairman of the Board and President of the
Placement Agent. See note (9) to the table in "Principal Stockholders,"
and "Certain Transactions."
(9) Wayne L. Rubin is Chief Financial Officer of the Placement Agent.
- ------------------------------
* indicates less than one percent
74
<PAGE>
(10) Carl A. Spana is the grandfather of Carl Spana, Ph.D., a director and
Executive Vice President of the Company.
(11) Lawrence L. Kuppin, general partner of Vivaldi, Ltd., was a director of
the Company before the Merger.
(12) Michael S. Weiss is a director of the Company and a Senior Managing
Director of the Placement Agent. See "Management" and "Certain
Transactions."
PLAN OF DISTRIBUTION
REGISTRATION. The Company has effected the Registration under the
Securities Act on behalf of the Selling Stockholders, pursuant to registration
rights contained in the agreements by which each Selling Stockholder acquired
Offered Shares or securities convertible into or exercisable for Offered Shares.
The Company will pay all expenses of the Registration, and of qualification or
exemption of the Offered Shares under state securities laws, excluding fees of
legal counsel for Selling Stockholders. The Company is obligated to use its best
efforts to keep the Registration effective until the Selling Stockholders have
completed the distribution described in this Prospectus. Whether or not the
Selling Stockholders have completed the described distribution, the Company may
cease to keep the Registration effective with respect to a Selling Stockholder's
Offered Shares at any time when such Selling Stockholder may sell all of such
Selling Stockholder's Offered Shares under Rule 144 under the Securities Act (or
other exemption from the registration requirements of the Securities Act
acceptable to the Company) in a three-month period.
SALES OF THE OFFERED SHARES. Selling Stockholders may, but are not required
to, sell Offered Shares from time to time directly to purchasers or through
underwriters, brokers, dealers or agents. Selling Stockholders will pay any
underwriting discounts or commissions applicable to the sale of the Offered
Shares. Selling Stockholders may sell Offered Shares on a securities exchange,
in the over-the-counter market, in privately negotiated transactions, or in a
combination of these methods, without notice to the Company. If a Selling
Stockholder intends to sell Offered Shares by any other method or transaction,
the Selling Stockholder must give the Company notice at least five business days
in advance. Selling Stockholders must sell Offered Shares in accordance with the
Registration Statement and must comply with the prospectus delivery requirements
of the Securities Act. Selling Stockholders must discontinue disposition of
Offered Shares during certain limited periods when (i) the Company is required
to supplement or amend this Prospectus, (ii) the Company is engaging in a
primary underwritten offering, or (iii) the Company determines that disclosure
of material undisclosed information required in a prospectus would have an
adverse effect on the Company or is otherwise inadvisable.
Selling Stockholders and any broker-dealers that participate in the sale
of the Offered Shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit on the resale of the Offered Shares as principal may be deemed to be
underwriting discounts and commissions under the Securities Act.
The Company has, as of the date of this Prospectus, informed the Selling
Stockholders that no National Association of Securities Dealers ("NASD") member
participating in the Offering may receive compensation in excess of 8% of the
proceeds of the sale of Offered Shares. In addition, the
75
<PAGE>
terms and arrangements of any underwritten offering must be filed with the NASD
for its review pursuant to Section 2710 of the NASD's Corporate Financing Rules.
The Company has, as of the date of this Prospectus, informed the Selling
Stockholders that the anti-manipulation provisions of Regulation M promulgated
under the Exchange Act may apply to the sales of Offered Shares, and of the
requirement for delivery of this Prospectus in connection with any sale of the
Offered Shares. Certain Selling Stockholders may from time to time purchase
shares of Common Stock in the open market. The Company has, as of the date of
this Prospectus, informed the Selling Stockholders that they should not commence
any distribution of the Offered Shares unless they have terminated their
purchasing of, bidding for and attempting to induce any other person to bid for
or purchase Common Stock in the open market as provided in applicable securities
regulations, including Regulation M.
LOCK-UP AGREEMENT. The Offered Shares which are issued on conversion of
shares of Series A Convertible Preferred Stock other than those issued on
exercise of Preferred Stock Placement Warrants (the "Lock-up Shares") are
subject to a partial, diminishing lock-up agreement for up to nine (9) months
after the effective date of the Registration Statement (the "Effective Date").
Without the prior written consent of the Placement Agent, holders of Lock-up
Shares may not directly or indirectly sell or otherwise dispose of the Lock-up
Shares according to the following schedule: 75% of Lock-up Shares are subject to
lock-up until three (3) months after the Effective Date; 50% of Lock-up Shares
are subject to lock-up until six (6) months after the Effective Date; 25% of
Lock-up Shares are subject to lock-up until nine (9) months after the Effective
Date; and the remaining 25% of the Lock-up Shares are not subject to any
restriction.
LEGAL MATTERS
Legal matters relating to the Offering will be passed upon for the Company
by Rubin Baum Levin Constant & Friedman, New York, New York, counsel to the
Company. Members of Rubin Baum Levin Constant & Friedman have been granted
options under the 1996 Stock Option Plan (subject to stockholder approval of the
1996 Stock Option Plan) to purchase an aggregate of 50,000 shares of Common
Stock at an exercise price of $2.00 per share.
EXPERTS
The financial statements for the ten-month transition period ended June 30,
1996 (post-Merger) and for the years ended August 31, 1995 and 1994
(pre-Merger), included in this Prospectus and in the Registration Statement,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included in reliance
upon the authority of Arthur Andersen LLP as experts in giving said report.
76
<PAGE>
CHANGES IN ACCOUNTANTS
As of July 9, 1996, in connection with the Merger, Deloitte & Touche LLP,
the Company's independent accountant which was engaged as the principal
accountant to audit the Company's financial statements, was dismissed. The
Company, after consultation with Arthur Andersen LLP, engaged Arthur Andersen
LLP as of July 9, 1996 as the principal accountant to audit the Company's
financial statements. Arthur Andersen LLP served as RhoMed's independent
accountant prior to the Merger.
RhoMed, prior to the Merger, consulted Arthur Andersen LLP regarding the
application of accounting principles to the proposed Merger. The primary issue
that was the subject of such consultations was the characterization of the
proposed Merger for accounting purposes. RhoMed was orally advised by Arthur
Andersen LLP that the Merger would be treated as a recapitalization of RhoMed
with RhoMed as the acquirer (reverse acquisition), and that the proposed Merger
would not constitute a business combination. The Company's former accountant,
Deloitte & Touche LLP, was not consulted by the Company regarding such issue.
The Company's decision to change accountants was recommended and approved
by the Company's Board of Directors subsequent to the Merger based upon the
Company's need for one independent accountant to be responsible for the
financial statements of the Company following the Merger. During Interfilm's
fiscal years ended December 31, 1995 and 1994, there were no disagreements
between the Company and Deloitte & Touche LLP, the Company's former independent
accountant, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. Further, during
Interfilm's fiscal years ended December 31, 1995 and 1994, respectively,
Deloitte & Touche LLP's opinion with respect to the Company's financial
statements was qualified as to the Company's ability to continue as a going
concern.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PALATIN TECHNOLOGIES, INC.
(RHOMED INCORPORATED PRIOR TO JUNE 25, 1996 REVERSE MERGER)
(A DEVELOPMENT STAGE ENTERPRISE)
CONTENTS PAGE
Report of Independent Public Accountants, Arthur Andersen LLP F-1
Audited Consolidated Financial Statements for the Period from Inception (January
28, 1986) through June 30, 1996 and for the Ten Months Ended June 30, 1996 and
the Years Ended August 31, 1995 and 1994
Consolidated Audited Balance Sheets as of June 30, 1996 and
August 31, 1995 F-3
Consolidated Statements of Operations for the period from inception
(January 28, 1986) through June 30, 1996 and for the ten months
ended June 30, 1996 and the years ended August 31, 1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
period from inception (January 28, 1986) through June 30, 1996 F-6
Consolidated Statements of Cash Flows for the period from inception
(January 28, 1986) through June 30, 1996 and for the ten months
ended June 30, 1996 and the years ended August 31, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-10
Unaudited Consolidated Financial Statements for the Period from Inception
(January 28, 1986) through March 31, 1997 and for the Three and Nine Months
Ended March 31, 1997 and March 31, 1996
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
June 30,1996 (audited) F-25
Consolidated Statements of Operations (unaudited) for the Three
and Nine Months Ended March 31, 1997 and March 31, 1996 and
the Period from January 28, 1986 (Commencement of Operations)
through March 31, 1997 F-26
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended March 31, 1997 and March 31, 1996 and the Period
From January 28, 1986 (Commencement of Operations)
through March 31, 1997 F-27
Notes to Unaudited Consolidated Financial Statements Page 28
78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Palatin Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of PALATIN
TECHNOLOGIES, INC. (a Delaware corporation in the development stage) AND
SUBSIDIARIES as of June 30, 1996 (post-Merger, see Note 1) and August 31, 1995
(pre-Merger), and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period from September 1,
1995 through June 30, 1996 (post-Merger, consisting of the statement of
operations and cash flows of RhoMed Incorporated, predecessor corporation in
the continuing business of Palatin Technologies, Inc. and subsidiaries for the
period from September 1, 1995 through June 25, 1996 (pre-Merger), audited by
us,
and the statements of operations and cash flows of Palatin Technologies, Inc.
and subsidiaries for the period from June 26, 1996 through June 30, 1996
(post-Merger), also audited by us, and for the years ended August 31, 1995 and
1994 (pre-Merger). We have also audited the consolidated statements of
operations and cash flows of Palatin Technologies, Inc. and subsidiaries for
the period from inception (January 28, 1986) through June 30, 1996
(post-Merger, consisting of the statements of operations and cash flows of
RhoMed Incorporated and Palatin Technologies, Inc. and subsidiaries as
described above). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
F-1
<PAGE>
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Palatin Technologies, Inc. and
subsidiaries as of June 30, 1996, and August 31, 1995, and the results of their
operations and their cash flows for each of the periods indicated above in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
July 31, 1996
F-2
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Balance Sheets
June 30, 1996 and August 31, 1995
<TABLE>
<CAPTION>
June 30, 1996 August 31, 1995
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,791,300 $ 474,018
Accounts receivable, including employee receivables of $113 and
$1,121 as of June 30, 1996 and August 31, 1995, respectively 4,574 5,626
Prepaid expenses and other 66,430 19,752
-------------- ----------
Total current assets 6,862,304 499,396
Equipment, net (Notes 2 and 4) 96,354 134,368
Intangibles, net of accumulated amortization of $91,336 and
$68,938 as of June 30, 1996 and August 31, 1995, respectively
(Notes 5 and 6) 82,547 319,965
-------------- ----------
$ 7,041,205 $ 953,729
============== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Balance Sheets
June 30, 1996 and August 31, 1995
- Continued -
<TABLE>
<CAPTION>
June 30, 1996 August 31, 1995
--------------------- ---------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, including related party payables of $34,234 as of
June 30, 1996 $ 214,424 $ 305,857
Accrued compensation owed to employees (Note 3) 78,084 171,290
Accrued expenses (Note 1) 655,197 112,747
Notes payable, related party (Note 3) -- 23,286
Current portion of long-term financing, including accrued interest
of $38,912 (Note 6) 311,695 105,000
Senior bridge notes, including related party transaction of $110,000
and $100,000 as of June 30, 1996 and August 31, 1995, respectively (Note 7) 1,100,000 1,000,000
------------ ------------
Total current liabilities 2,359,400 1,718,180
Long-term financing, including accrued interest of $273,339
and $285,614 as of June 30, 1996 and August 31, 1995, respectively
(Note 6) 1,727,619 1,972,677
Notes payable to stockholders, including accrued interest of
$35,979 and $29,312 as of June 30, 1996 and August 31, 1995,
respectively (Note 8) 115,979 109,312
------------ ------------
4,202,998 3,800,169
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit) (Notes 1, 3, 6, 7, 8, 9 and 10):
Preferred stock, $.01 and zero par value, and 2,000,000 and 10,000,000
shares authorized, as of June 30, 1996 and August 31, 1995, respectively;
no shares issued as of June 30, 1996 and August 31, 1995; 4,000,000
subscribed as of August 31, 1995 -- --
Preferred stock subscribed -- 4,000
Preferred stock receivable -- (4,000)
Common stock, $.01 and zero par value, and 25,000,000 and 40,000,000
shares authorized, as of June 30, 1996 and August 31, 1995, respectively;
11,538,777 and 6,922,069 issued as of June 30, 1996 and
August 31, 1995, respectively 115,388 1,177,786
Additional paid-in capital 10,804,394 --
Common stock earned but not issued 53,030 110,833
Paid-in capital from common stock warrants -- 100,000
Treasury stock, 1,229 shares (1,667) --
Deficit accumulated during development stage (8,132,938) (4,235,059)
------------ ------------
2,838,207 (2,846,440)
------------ ------------
$ 7,041,205 $ 953,729
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-4
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Operations
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended June 30, 1996
and the Years Ended August 31, 1995 and 1994
<TABLE>
<CAPTION>
Inception Fiscal Year Ended
(January 28, 1986) Ten Months August 31,
through Ended ----------------------------------
June 30, 1996 June 30, 1996 1995 1994
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Grants and contracts (Note 11) $ 2,860,512 $ - $ - $ 50,289
License fees and royalties (Note 12) 334,296 - 64,296 50,000
Sales 296,733 24,457 33,606 47,559
----------------- ---------------- ---------------- ----------------
Total revenues 3,491,541 24,457 97,902 147,848
----------------- ---------------- ---------------- ----------------
EXPENSES:
Research and development 4,396,408 869,896 619,354 584,941
General and administrative 5,018,961 1,366,343 776,291 939,155
Restructuring charge (Note 9) 284,000 284,000 - -
Net intangibles write down (Note 5) 259,334 259,334 - -
----------------- ---------------- ---------------- ----------------
Total operating expenses 9,958,703 2,779,573 1,395,645 1,524,096
----------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSES):
Other income 71,380 10,515 2,744 16,561
Interest expense (1,043,186) (459,308) (343,865) (185,268)
Placement agent commissions and
fees on debt offering (168,970) (168,970) - -
Merger costs (525,000) (525,000) - -
----------------- ---------------- ---------------- ----------------
Total other income (expenses) (1,665,776) (1,142,763) (341,121) (168,707)
----------------- ---------------- ---------------- ----------------
NET LOSS $ (8,132,938) $ (3,897,879) $ (1,638,864) $ (1,544,955)
================= ================ ================ ================
Weighted average number of common
shares outstanding 1,173,525 2,144,131 1,238,192 1,205,617
================= ================ ================ ================
Net loss per common share $ (6.93) $ (1.82) $ (1.32) $ (1.28)
================= ================ ================ ================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from Inception (January 28, 1986)
Through June 30, 1996
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------------------
Shares Amount Subscriptions Receivable
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Balance at inception -- $ -- $ -- $ --
Issuance of shares from inception -- -- -- --
Net loss from inception -- -- -- --
------------------ ------------------ ------------------ ------------------
Balance, August 31, 1994 -- -- -- --
Issuance of shares -- -- -- --
Shares earned but not issued -- -- -- --
Issuance of options -- -- -- --
Paid-in capital from common
stock warrants -- -- -- --
Preferred stock subscriptions -- -- 4,000 (4,000)
Net loss -- -- -- --
------------------ ------------------ ------------------ ------------------
Balance, August 31, 1995 -- -- 4,000 (4,000)
Preferred stock subscriptions -- -- (4,000) 4,000
Issuance of preferred shares 4,000,000 4,000 -- --
Issuance of common shares on
$10,395,400 private placement -- -- -- --
Shares earned but not issued -- -- -- --
Issuance of common shares -- -- -- --
Net loss -- -- -- --
------------------ ------------------ ------------------ ------------------
Balance, June 25, 1996 4,000,000 4,000 -- --
Conversion to Palatin Technologies, Inc. (4,000,000) (4,000) -- --
------------------ ------------------ ------------------ ------------------
Adjusted balance, June 25, 1996 -- -- -- --
Shares outstanding of Palatin
Technologies, Inc. -- -- -- --
Issuance of common shares -- -- -- --
Purchase of treasury stock -- -- -- --
------------------ ------------------ ------------------ ------------------
Balance, June 30, 1996 -- $ -- $ -- $ --
================== ================== ================== ==================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from Inception (January 28, 1986)
Through June 30, 1996
- Continued -
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------------------------------------------
Paid-in
Additional Earned but Capital from
Shares Amount Paid-in Capital not Issued Warrants
------------ ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at inception -- $ -- $ -- $ -- $ --
Issuance of shares from inception 6,562,467 1,158,883 -- -- --
Net loss from inception -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, August 31, 1994 6,562,467 1,158,883 -- -- --
Issuance of shares 359,602 10,203 -- -- --
Shares earned but not issued -- -- -- 110,833 --
Issuance of options -- 8,700 -- -- --
Paid-in capital from common
stock warrants -- -- -- -- 100,000
Preferred stock subscriptions -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, August 31, 1995 6,922,069 1,177,786 -- 110,833 100,000
Preferred stock subscriptions -- -- -- -- --
Issuance of preferred shares -- -- -- -- --
Issuance of common shares on
$10,395,400 private placement 41,581,600 9,139,303 -- -- --
Shares earned but not issued -- -- -- 266,743 --
Issuance of common shares 1,054,548 458,977 -- (324,546) (100,000)
Net loss -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, June 25, 1996 49,558,217 10,776,066 -- 53,030 --
Conversion to Palatin Technologies, Inc. (38,555,207) (10,666,035) 10,670,035 -- --
------------ ------------ --------------- ------------ -------------
Adjusted balance, June 25, 1996 11,003,010 110,031 10,670,035 53,030 --
Shares outstanding of Palatin
Technologies, Inc. 432,750 4,327 (4,327) -- --
Issuance of common shares 103,017 1,030 138,686 -- --
Purchase of treasury stock -- -- -- -- --
------------ ------------ --------------- ------------ -------------
Balance, June 30, 1996 11,538,777 $ 115,388 $ 10,804,394 $ 53,030 $ --
============ ============ =============== ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Treasury Development
Stock Stage Total
------------ --------------- --------------
<S> <C> <C> <C>
Balance at inception $ -- $ -- $ --
Issuance of shares from inception -- -- 1,158,883
Net loss from inception -- (2,596,195) (2,596,195)
------------ --------------- --------------
Balance, August 31, 1994 -- (2,596,195) (1,437,312)
Issuance of shares -- -- 10,203
Shares earned but not issued -- -- 110,833
Issuance of options -- -- 8,700
Paid-in capital from common
stock warrants -- -- 100,000
Preferred stock subscriptions -- -- --
Net loss -- (1,638,864) (1,638,864)
------------ --------------- --------------
Balance, August 31, 1995 -- (4,235,059) (2,846,440)
Preferred stock subscriptions -- -- --
Issuance of preferred shares -- -- 4,000
Issuance of common shares on
$10,395,400 private placement -- -- 9,139,303
Shares earned but not issued -- -- 266,743
Issuance of common shares -- -- 34,431
Net loss -- (3,897,879) (3,897,879)
------------ --------------- --------------
Balance, June 25, 1996 -- (8,132,938) 2,700,158
Conversion to Palatin Technologies, Inc. -- -- --
------------ --------------- --------------
Adjusted balance, June 25, 1996 -- (8,132,938) 2,700,158
Shares outstanding of Palatin
Technologies, Inc. -- -- --
Issuance of common shares -- -- 139,716
Purchase of treasury stock (1,667) -- (1,667)
------------ --------------- --------------
Balance, June 30, 1996 $ (1,667) $ (8,132,938) $ 2,838,207
============ =============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended June 30, 1996
and the Years Ended August 31, 1995 and 1994
Inception Fiscal Year Ended
(January 28, 1986) Ten Months August 31,
through Ended ----------------------------
June 30, 1996 June 30, 1996 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,132,938) $ (3,897,879) $ (1,638,864) $ (1,544,955)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 308,574 68,005 85,947 80,523
Interest expense on related-party debt 53,387 6,667 8,000 8,000
Accrued interest on long-term financing 796,038 293,380 320,709 169,438
Accrued interest on short-term financing 107,936 100,000 7,936 --
Intangibles and equipment write down 278,318 278,318 -- --
Equity and notes payable issued for expenses 296,047 174,147 10,350 15,450
Settlement with consultant (28,731) -- -- --
Changes in certain operating assets and liabilities:
Accounts receivable (4,574) 1,052 2,557 (1,198)
Prepaid expenses and other (66,430) (46,678) (5,206) 13,257
Intangibles (427,337) (44,314) (66,152) (73,383)
Accounts payable 213,524 (91,433) 164,744 67,269
Accrued compensation owed to employees 94,632 (93,206) 10,551 (4,444)
Accrued expenses 683,928 542,450 39,961 9,825
------------- ------------- ------------ ------------
Net cash used for operating activities (5,827,626) (2,709,491) (1,059,467) (1,260,218)
------------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (335,229) (26,577) (4,294) (133,714)
------------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party 302,000 -- 302,000 --
Payments on notes payable, related party (309,936) (23,286) (286,650) --
Proceeds from senior bridge notes payable 1,850,000 850,000 1,000,000 --
Payments on senior bridge notes (850,000) (850,000) -- --
Proceeds from notes payable and
long-term financing 1,951,327 -- 292,063 500,000
Payments on notes payable and
long-term financing (190,061) (65,000) (92,384) (15,477)
Proceeds from paid-in capital from common
stock warrants 100,000 -- 100,000 --
Proceeds from common stock, stock option
issuances and preferred stock, net 10,102,492 9,143,303 345 191,812
Purchase of treasury stock (1,667) (1,667) -- --
------------- ------------- ------------ ------------
Net cash provided by financing activities 12,954,155 9,053,350 1,315,374 676,335
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH 6,791,300 6,317,282 251,613 (717,597)
CASH, beginning of period -- 474,018 222,405 940,002
------------- ------------- ------------ ------------
CASH, end of period $ 6,791,300 $ 6,791,300 $ 474,018 $ 222,405
============= ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended June 30, 1996
and the Years Ended August 31, 1995 and 1994
- Continued -
Inception Fiscal Year Ended
(January 28, 1986) Ten Months August 31,
through Ended ---------------------------
June 30, 1996 June 30, 1996 1995 1994
---------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 77,523 $ 49,494 $ 28,029 $ -
================ ================ ============= ============
NON-CASH TRANSACTION:
Settlement of accounts payable with
equipment $ 900 $ - $ - $ 900
================ ================ ============= ============
NON-CASH STOCK ACTIVITY:
Conversion of loans from employees to
common stock $ 74,187 $ - $ - $ -
================ ================ ============= ============
Conversion of note payable to common stock $ 16,000 $ - $ - $ -
================ ================ ============= ============
Common stock issued for equipment $ 2,327 $ - $ - $ -
================ ================ ============= ============
Common stock issued for expenses
(included above) $285,332 $174,147 $ 10,350 $ 15,450
================ ================ ============= ============
Common stock issued for accrued salaries
and bonuses $ 16,548 $ - $ 9,858 $ 3,390
================ ================ ============= ============
Accrued interest payable in common stock $375,926 $266,743 $109,183 $ -
================ ================ ============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-9
<PAGE>
PALATIN TECHNOLOGIES, INC.
(RhoMed Incorporated prior to June 25, 1996 Reverse Merger)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
for the Period from Inception (January 28, 1986)
through June 30, 1996 and for the Ten Months Ended
June 30, 1996 and the Years Ended August 31, 1995 and 1994
(1) ORGANIZATION ACTIVITIES:
Corporate Structure -- Palatin Technologies, Inc. ("Palatin"),
formerly Interfilm, Inc., was incorporated under the laws of the State of
Delaware on November 21, 1986. Since November 4, 1993, when Palatin acquired
Interfilm Technologies, Inc., a New York corporation, it had been primarily
engaged in the business of exploiting the rights related to its interactive
motion picture process, including the production and distribution of
interactive motion pictures for initial exhibition in theaters and
subsequently in enhanced versions for distribution to the home market.
Palatin's initial public offering was consummated on October 28, 1993. On May
10, 1995, the Board of Directors of Palatin decided to substantially curtail
the operations of Palatin and its subsidiaries.
Merger -- On June 25, 1996, a newly formed, wholly-owned subsidiary of
Palatin, Interfilm Acquisition Corporation ("InSub"), a New Mexico
corporation, merged with and into RhoMed Incorporated ("RhoMed"), a New Mexico
corporation, with all outstanding shares of RhoMed equity securities
ultimately being exchanged for Palatin's common stock (the "Merger"). As a
result of the Merger, RhoMed became a wholly-owned subsidiary of Palatin, with
the holders of RhoMed preferred stock and RhoMed common stock (including the
holders of "RhoMed Derivative Securities" as hereafter defined) receiving an
aggregate of approximately 96% interest in the equity securities of Palatin on
a fully-diluted basis. Additionally, all warrants and options to purchase
common stock of RhoMed outstanding immediately prior to the Merger (the
"RhoMed Derivative Securities"), including without limitation, any rights
underlying RhoMed's qualified or nonqualified stock option plans, were
automatically converted into rights upon exercise to receive Palatin's common
stock in the same manner in which the shares of RhoMed common stock were
converted. Since the former stockholders of RhoMed retained more than a 50%
controlling interest in the surviving company (Palatin), the Merger was
accounted for as a reverse merger. Certain assets and liabilities of Palatin
and a subsidiary existing prior to the Merger, consisting principally of
certain intellectual property and litigation claims against Sony Corporation
of America and related entities, were transferred to an unaffiliated limited
liability partnership for the benefit of Palatin stockholders of record as of
June 21, 1996, immediately prior to the Merger. Pro forma combined operating
results of the merged companies are not presented since the reverse merger is
not a business combination for accounting purposes. The historical financial
statements prior to June 25, 1996, are those of RhoMed, except that the net
loss per common share has been stated on an as if converted basis. In
addition, the Merger costs of $450,000 have been charged to operations for the
ten months ended June 30, 1996, and accrued expenses include $231,635 of this
amount as of June 30, 1996.
On July 19, 1996, an amendment to the Certificate of Incorporation of
Palatin (the "Amendment") was filed, which (a) effected the change of name
from Interfilm, Inc. to Palatin Technologies, Inc., (b) increased the total
number of authorized shares of Palatin's common stock, par value $.01 per
share (the "Common Stock"), from 10,000,000 to 25,000,000, and (c) effected a
1-for-10 reverse split of Common Stock. Upon the filing of the Amendment, each
share of RhoMed preferred stock was
F-10
<PAGE>
converted into .46695404349 shares of Common Stock, and each share of RhoMed
common stock was converted into .184332593 shares of Common Stock. The
consolidated financial statements have been adjusted to reflect the Amendment
as if it had been filed on June 30, 1996.
Nature of Business -- Palatin, through its wholly-owned subsidiary,
RhoMed, is a development stage enterprise dedicated to developing and
commercializing products and technologies for diagnostic imaging, cancer
therapy and ethical drug development based upon its proprietary monoclonal
antibody, radiolabeling and enabling peptide platform technologies. Palatin
had, prior to June 25, 1996, conducted no on-going business activities since
May 10, 1995. The business of RhoMed, conducted by Palatin since June 25,
1996, when the Merger became effective, represents the on-going business of
Palatin.
Since its inception, RhoMed has devoted substantially all of its
efforts and resources to the research and development of its technology.
RhoMed has experienced operating losses in each year since its inception and,
as of June 30, 1996, Palatin, including its wholly-owned subsidiary RhoMed,
had a deficit accumulated during the development stage of $8,132,938. Palatin
expects to incur additional operating losses over the next several years and
expects cumulative losses to increase as Palatin's research and development
and clinical testing efforts continue and expand. The ultimate completion of
Palatin's development projects is contingent upon a number of factors,
including the successful completion of technology and product development,
obtaining required regulatory approvals and additional financing and,
ultimately, achieving profitable operations.
Change in Fiscal Year -- Effective June 30, 1996, Palatin and RhoMed
each changed its fiscal year end to June 30. The fiscal year ends of Palatin
and RhoMed prior to the Merger were December 31 and August 31, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -- The consolidated financial statements
include the accounts of Palatin and its wholly owned subsidiary, RhoMed. The
remaining subsidiaries of Palatin - Interfilm Technologies, Inc., Ediflex
Digital Systems, Inc. and Production Equipment Leasing Corp. LP - are
inactive. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Accounting Basis -- The financial books and records of Palatin are
maintained on the accrual basis of accounting. As a development stage
enterprise, cumulative results of operations from inception are presented.
Cash -- For purposes of presenting cash flows, Palatin considers cash
as amounts on hand, on deposit in financial institutions and highly liquid
investments purchased with an original maturity of three months or less.
Equipment -- Equipment and office furniture are stated at cost, net of
accumulated depreciation. Depreciation is recognized using an accelerated
method over the estimated useful lives of 5 years for equipment, 7 years for
office furniture and over the term of the lease for leasehold improvements.
Maintenance and repairs are expensed as incurred while expenditures that
extend the useful life of an asset are capitalized.
Patents -- Patents represent the costs capitalized to successfully
obtain a patent registration. Internal costs to obtain and develop the patents
have been expensed. Patents are included as intangible assets in the
accompanying consolidated financial statements and are stated at cost, net of
accumulated amortization. Amortization is recognized using the straight-line
method over the estimated patent lives
F-11
<PAGE>
ranging up to 17 years. Unsuccessful patent costs and patents with no
demonstrated future value are expensed when so determined by management.
Revenue Recognition -- The Company recognizes revenue as follows: grants
and contracts - at the time such related expenses are incurred in compliance
with contractual terms; license fees and royalties - ratably over the term of
the license or royalty agreement; and sales - upon shipment of the product.
Research and Development Costs -- The costs of research and development
activities are expensed as incurred.
Stock Options and Warrants -- Warrants and most common stock options have
been issued at exercise prices greater than, or equal to, their fair market
value at the date granted. Accordingly, no value has been assigned to these
instruments. However, certain stock options were issued in the fiscal years
ended August 31, 1995 and 1994 under a nonqualified stock option plan at an
exercise price below market value. The difference between the exercise price
and the market value of these securities has been included in general and
administrative expense in the fiscal years ended August 31, 1995 and 1994, and
as an addition to equity.
Income Taxes -- Palatin and its subsidiaries intend to file consolidated
federal and combined state income tax returns. Palatin accounts for income
taxes in accordance with Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes." SFAS 109 requires, among other
things, the use of the liability method in computing deferred income taxes.
Palatin provides for deferred income taxes relating to timing differences
in the recognition of income and expense items (primarily relating to
depreciation, amortization and certain leases) for financial and tax reporting
purposes. Such amounts are measured using current tax laws and regulations in
accordance with the provisions of SFAS 109.
In accordance with SFAS 109, Palatin has recorded valuation allowances
against the realization of its deferred tax assets. The valuation allowance
is based on management's estimates and analysis, which includes tax laws which
may limit Palatin's ability to utilize its tax loss carryforwards.
Net Loss per Common Share -- Net loss per common share is calculated
based upon the weighted average number of shares of Common Stock, on an as if
converted basis, outstanding during each period. All options and warrants
were excluded in the calculation of weighted average shares outstanding since
their inclusion would have had an anti-dilutive effect.
Financial Statement Presentation -- Certain amounts in the accompanying
consolidated financial statements have been reclassified and certain notes have
been modified from previous financial statements to clarify disclosure.
Use of Estimates -- The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
New Pronouncements -- The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-Based Compensation." SFAS 123 recommends changes in accounting for
employee stock-based compensation plans, and requires certain disclosures with
respect to these plans. The disclosures of SFAS 123 will be adopted by
F-12
<PAGE>
Palatin effective July 1, 1996. Management has not determined the effect of
this pronouncement on the Company's financial statements.
Fair Value of Financial Instruments -- Statement of Financial Accounting
Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial
Instruments," requires disclosures of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate the value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including discount rate and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of Palatin.
The following methods and assumptions were used by Palatin in estimating
its fair value disclosures for financial instruments: the carrying amount
reported on the balance sheet approximates the fair value for cash, short-term
borrowings and current maturities of long-term debt; and the fair value for
Palatin's fixed rate long-term debt is estimated based on the current rates
offered to Palatin for debt of the same remaining maturities. Based on the
above, the amount reported on the balance sheet approximates the fair value.
(3) RELATED PARTY TRANSACTIONS:
Castle Transaction -- During the fiscal year ended August 31, 1995,
RhoMed encountered serious liquidity and working capital deficiencies. As a
result, effective April 1995, RhoMed entered into a letter of intent with The
Castle Group Ltd. ("Castle"), a company controlled by Lindsay A. Rosenwald,
M.D. ("Dr. Rosenwald"), under which Castle agreed to arrange for a line of
credit of up to $300,000 to finance ongoing operations; agreed to arrange for
future financings; and RhoMed agreed to sell to Castle or its designees, for
$4,000 consideration paid, 4,000,000 shares of RhoMed Series A Preferred Stock
(equivalent to 1,867,809 shares of Common Stock). At the time the letter of
intent was entered into with Castle, RhoMed was insolvent and its equity had
nominal value; accordingly, the sale of RhoMed Series A Preferred Stock to
Castle or its designees was recorded at the nominal $4,000 consideration paid.
The issuance of RhoMed Series A Preferred Stock to designees of Castle was
consummated on October 25, 1995. This resulted in Dr. Rosenwald and his
designees obtaining majority ownership and control of RhoMed. Pursuant to the
letter of intent, Castle provided a $300,000 line of credit. RhoMed borrowed
up to the maximum under the line of credit and, at August 31, 1995, had
$23,286 outstanding thereunder, which was paid in September, 1995. The
average interest rate for the line of credit was 10.90%, and the average
balance outstanding was $191,549.
Dr. Rosenwald is the Chairman of Paramount Capital, Inc. ("Paramount"),
which served as placement agent for RhoMed as set forth below. Commencing
July 24, 1995, two of the then three members of the Board of Directors of
RhoMed were employees of entities controlled by Dr. Rosenwald (the "Interested
Directors"). These Interested Directors may have benefited, directly or
indirectly, from the payment of commissions and expenses, and the issuance of
warrants, to Paramount and affiliates. On July 28, 1995, RhoMed's Board of
Directors approved an offering of Senior Bridge Notes and Class A Warrants
(the "Class A Offering") (see Note 7), for which Paramount served as placement
agent. Because the Interested Directors could be deemed to have a direct or
indirect interest in a transaction involving a potential conflict of interest
with RhoMed (a "Conflict Of Interest Transaction") contemplated under certain
terms of the Class A Offering, the transaction was ratified by disinterested
F-13
<PAGE>
stockholders on August 15, 1995. In the Class A Offering, investment funds
managed by a company of which Dr. Rosenwald is president purchased Senior
Bridge Notes with a face value of $100,000, and Class A Warrants to purchase
300,000 shares of RhoMed common stock at $.01 per share (equivalent to 55,299
shares of Common Stock at $.05 per share).
On November 27, 1995, RhoMed's Board of Directors approved an offering of
Senior Bridge Notes and Class B Warrants (the "Class B Offering") (see Note
7), for which Paramount served as placement agent. Because certain terms of
the Class B Offering could also be deemed to be a Conflict of Interest
Transaction, the Interested Directors recused themselves from voting on the
matter, and the Class B Offering was approved by the two disinterested
directors. In the Class B Offering, investment funds managed by a company of
which Dr. Rosenwald is president purchased Senior Bridge Notes with a face
value of $100,000, and Class B Warrants to purchase 100,000 shares of RhoMed
common stock at an adjusted exercise price of $.125 per share (equivalent to
18,433 shares of Common Stock at $.68 per share).
On March 4, 1996, the Board of Directors approved an offering of common
stock (the "Common Stock Offering") (see Note 10), and authorized an offering
committee of the Board of Directors, consisting of the two disinterested
directors, to determine the placement agent for the Common Stock Offering.
The selection of Paramount as placement agent was approved by the
disinterested directors, who concluded that alternative means of financings
were not available to RhoMed on terms more favorable than the Common Stock
Offering. The price per share of RhoMed common stock in the Common Stock
Offering of $.25 was determined through negotiations between RhoMed and
Paramount. On May 14, 1996, the Board of Directors approved an increase in
the Common Stock Offering, on which the Interested Directors recused
themselves, and which was approved by the two disinterested directors. In the
Common Stock Offering, investment funds managed by a company of which Dr.
Rosenwald is president purchased 7,002,000 shares of RhoMed common stock at
$.25 per share (equivalent to 1,290,696 shares of Common Stock at $1.36 per
share).
Accrued Compensation -- At June 30, 1996 and August 31, 1995, RhoMed owed
employees approximately $78,000 and $171,000, respectively, for accrued and
unpaid compensation and related benefits. These amounts do not accrue
interest and are included in accrued compensation in the accompanying
consolidated financial statements. All such amounts are expected to be paid
in fiscal year 1997.
Other Transactions -- There have been certain transactions between
Palatin and certain related parties which have resulted in the exchange of
assets or services for equity securities (see Note 10).
Management of Palatin believes that the terms of the transactions and the
agreements described above are on terms at least as favorable as those which
it could otherwise have obtained from unrelated parties.
F-14
<PAGE>
(4) EQUIPMENT:
Equipment consists of the following at June 30, 1996 and August 31, 1995:
June 30, August 31,
1996 1995
------------- ------------
Office equipment $ 202,960 $ 183,322
Laboratory equipment 76,929 69,989
Leasehold improvements - 57,668
------------- ------------
Equipment at cost 279,889 310,979
Less: Accumulated depreciation 183,535 176,611
------------- ------------
$ 96,354 $ 134,368
============= ============
(5) INTANGIBLES:
Palatin has obtained 11 United States (U.S.) patents and corresponding
international applications have been issued or are pending in selected
countries on a majority of issued U.S. patents. Palatin has applications
pending for 17 additional U.S. patents, the majority of which have pending
international counterparts in selected countries. Palatin has received
Notices of Allowance, and has paid issue fees, on certain pending U.S. patent
applications.
Based on an evaluation by the new President and Chief Executive Officer
of RhoMed and his new management team (see Note 9) of products in development
and determination of the likelihood of product development and
commercialization, intangible assets relating to patents not being utilized
for products in active development were written-off to expense. Historical
costs in each patent were used to determine the total write-off to expense of
$259,334.
Palatin has assigned its interest in several patents to secure long-term
financing (see Note 6).
(6) LONG-TERM FINANCING:
Palatin has a long-term financing agreement with Aberlyn Holding Co.,
Inc., and its affiliates (collectively "Aberlyn"). Aberlyn has, in a series
of transactions, loaned to Palatin approximately $1,800,000, secured by
certain of Palatin's patents, intellectual property and equipment. Certain
fees and costs related to the borrowings have been deferred as intangible
assets and are being amortized over the remaining terms of the arrangement
using the effective interest method. The agreement requires the accrual of
certain interest as payable before it is earned; therefore, at any time before
the scheduled payoff, the recorded long-term liability will be less than the
total amount payable to settle the obligation.
Palatin is obligated, at June 30, 1996, to make monthly payments to
Aberlyn of $20,000 from June 1, 1996 through May 1, 1997, and payments of
$91,695 from June 1, 1997 through May 1, 1999. Payments through May 1, 1997
will be applied to principal only; interest will be accrued during this period
at an annual effective rate of 15% and paid in Palatin's Common Stock. On
June 24, 1996, RhoMed issued 930,023 shares of RhoMed common stock (equivalent
F-15
<PAGE>
to 171,433 shares of Common Stock) in payment of accrued interest of $324,546
through April 30, 1996, at an immaterial premium of approximately $.10 per
share over the then fair market value of RhoMed common stock. In addition,
certain warrants held by Aberlyn were terminated, and RhoMed agreed that
Common Stock paid as interest through May 1, 1997, would contain certain
registration rights, and would be valued at the rate of 75% of the per share
offering price for RhoMed's common stock in any offering commencing after the
consummation of the Common Stock Offering, in which the total offering
proceeds exceeds $5,000,000, or in the event no such offering is completed
before April 30, 1997, at the rate of 75% of the average per share closing
price for the twenty trading days immediately preceding April 30, 1997. The
25% discount to market value of Common Stock will represent additional
interest payable. However, management does not anticipate the additional
interest will have a material impact on the financial position or operations
of the Company.
Scheduled principal payments on the long-term financing through fiscal
year 1999 at June 30, 1996, are as follows:
Years ending June 30,
---------------------
1997 $ 272,783
1998 697,317
1999 756,963
-------------
Total principal payments 1,727,063
Accrued interest 312,251
-------------
$ 2,039,314
=============
(7) SENIOR BRIDGE NOTES:
The warrants set forth below were initially exercisable for RhoMed common
stock and are so described. At Note 10 all outstanding warrants, including
all RhoMed warrants, are shown as converted to Common Stock.
Class A Offering -- On July 28, 1995, the Board of Directors of RhoMed
authorized an offering of up to 40 units at $25,000 per unit, with each unit
consisting of a $25,000 face amount Senior Bridge Note and a Class A Warrant
to purchase 75,000 shares of RhoMed common stock at an exercise price of $.01
per share (the "Class A Offering") (see Note 3). The nominal exercise price
for the warrants reflected the seriously troubled financial condition of
RhoMed on the date of the transaction, and accordingly no value was assigned
to the Class A Warrants upon issuance. The Senior Bridge Notes sold in the
Class A Offering bear interest at 1% per month, and are payable, with accrued
interest, one year from the date of issuance. Class A Warrants are
exercisable at any time, terminate ten years from the date of issuance, have
certain registration rights, and are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of, the Common Stock.
All Class A Offering units were purchased, with net proceeds to RhoMed of
approximately $907,000 after payment of the placement agent's commissions and
expenses ($90,000) and offering expenses (approximately $3,000). Paramount
(see Note 3), served as placement agent for the offering and received (i) a
cash commission equal to 6% of the gross proceeds from the sale of the units,
(ii) a non-accountable expense allowance equal to 3% of gross proceeds and
(iii) placement agent's warrants ("Class A Placement Agent Warrants"), on the
F-16
<PAGE>
same terms as the Class A Warrants, equal to 15% of the Common Stock
underlying the Class A Warrants issued in the Class A Offering.
Class B Offering -- On November 27, 1995, the Board of Directors of
RhoMed authorized an offering of up to 7.5 units at $100,000 per unit, with
each unit consisting of a $100,000 face amount Senior Bridge Note and a Class
B Warrant to purchase 100,000 shares of RhoMed common stock at an exercise
price of the lesser of (a) $.25 per share and (b) 50% of the price per share
of common stock in a subsequent equity offering of RhoMed common stock in
which gross proceeds exceed $2,500,000 (the "Class B Offering"). Due to the
seriously troubled financial condition of RhoMed on the date of the
transaction, no value was assigned to the Class B Warrants upon issuance. On
January 25, 1996, the Board of Directors increased the Class B Offering from
7.5 units to 8.5 units. The Senior Bridge Notes sold in the Class B Offering
bore interest at 1% per month, and were payable, with accrued interest, at the
earlier of (a) 5 days following the closing of an equity offering of RhoMed's
securities in which gross proceeds exceeded $2,500,000 and (b) 12 months from
the date of issuance. The Class B Warrants are exercisable at any time,
terminate 5 years from the date of issuance, have certain registration rights,
contain a call provision and are subject to adjustment in certain
circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of, the Common Stock.
On February 15, 1996, the purchase of units was completed. Net proceeds
to RhoMed were $739,500 after payment of the placement agent's commissions and
expenses ($110,500). Paramount (see Note 3), served as placement agent for
the Class B Offering and received (i) a cash commission equal to 9% of the
gross proceeds from the sale of the units, (ii) a non-accountable expense
allowance equal to 4% of gross proceeds and (iii) placement agent's warrants
("Class B Placement Agent Warrants"), at an exercise price of $.30 per share
but otherwise on the same terms as the Class B Warrants, equal to 5% of the
Common Stock underlying the Class B Warrants issued in the Class B Offering.
On June 28, 1996, the Class B Offering Senior Bridge Notes with accrued
interest were paid in full.
(8) NOTES PAYABLE TO STOCKHOLDERS:
At June 30, 1996 and August 31, 1995, notes payable to stockholders
consisted of four ten year notes totaling $80,000 plus interest accrued
thereon. These notes were issued as part of a combined stock and debt
offering during the fiscal year ended August 31, 1992 (see Note 10). Each
note is a promissory note from RhoMed to the purchaser in the face amount of
$20,000, bearing interest at 10% per year, accruing annually. Principal and
interest on the notes becomes due and payable on the earlier of (i) July 31,
2002, or (ii) 30 days after RhoMed, or its successor, receives net proceeds
from a public offering of its common stock of at least $5,000,000 or (iii) 30
days after the end of a fiscal year in which, as reflected on the audited
financial statements of RhoMed or its successor, RhoMed or its successor has
net assets of at least $5,000,000 or net income of at least $5,000,000. The
notes had a provision providing for conversion into common stock on the basis
of one share of stock for each $1.50 of principal and accrued interest. As a
result of the Merger, there is no longer a right to convert.
(9) COMMITMENTS AND CONTINGENCIES:
Leases -- Palatin leases certain of its facilities and equipment under
noncancellable operating leases. The lease on the facility in Albuquerque,
New Mexico expires on December 31, 1996. Minimum future annual lease payments
F-17
<PAGE>
at June 30, 1996, are approximately $55,000 in fiscal year 1997, and
approximately $12,000 to $21,000 per year thereafter until fiscal year 2001.
Certain leases have been personally guaranteed by one or more former officers
of RhoMed.
Product Liability -- The testing, marketing and sale of human health care
products entails an inherent risk of allegations of product liability.
Palatin does not currently have product liability insurance coverage.
Restructuring Charge -- In conjunction with Palatin's decision to
consolidate and relocate its research and development facilities and executive
offices in the New Jersey area, Palatin established a restructuring charge of
$284,000. The restructuring charge represents severance costs of $115,000 and
facility closing expenses of $169,000. It is anticipated that eight research
and development and administration and management employees will be severed;
through June 30, 1996, five employees had been severed. Facility closing
expenses consist primarily of costs related to lease termination and fixed
asset disposals. Included in accrued expenses at June 30, 1996, is $257,152 of
remaining restructuring charge.
Commitments -- On November 27, 1995, the Board of Directors of RhoMed
ratified an employment agreement (the "Employment Agreement") with Edward J.
Quilty ("Mr. Quilty") to serve as President and Chief Executive Officer of
RhoMed. Pursuant to the Agreement, RhoMed agreed to grant Mr. Quilty an
option to acquire such number of shares of common stock as equal a 10% fully
diluted equity interest in RhoMed at an exercise price of $.01 per share,
which option vests in 36 equal increments on each of the first 36 monthly
anniversaries of the commencement of Mr. Quilty's employment with RhoMed, and
may be accelerated or terminated in part on the happening of certain events
(the "Initial Option"). The Agreement further provides for anti-dilutive
options, pursuant to which Mr. Quilty will be issued options to acquire the
number of shares that, when aggregated with the shares issuable pursuant to
the Initial Option, equal not less than 3.75% of the shares of common stock of
RhoMed. The Agreement is for an initial period of one year, with automatic
one year extensions, and provides that, on certain termination events, the
portion of the options that would otherwise have terminated without vesting,
vest and are exercisable upon termination, and also provides for specified
termination pay.
Palatin is obligated under two consulting agreements to make payments of
$157,000 in fiscal year 1997 and $76,500 in fiscal year 1998.
Legal Proceedings -- Palatin is subject to various claims and litigation
in the ordinary course of its business, including patent proceedings.
Management believes that the outcome of such legal proceedings will not have a
material adverse effect on Palatin's financial position or future results of
operation.
(10) STOCKHOLDERS' EQUITY (DEFICIT):
Palatin Authorized Shares -- The authorized capital stock of Palatin at
the time of the Merger consisted of 10,000,000 Common Stock shares and
2,000,000 shares of preferred stock, $.01 par value per share. On July 19,
1996, Palatin's Certificate of Incorporation was amended to, among other
things, increase the number of shares of authorized Common Stock to 25,000,000
and to effect a 1-for-10 reverse split of the Common Stock. The consolidated
financial statements have been adjusted to reflect the amendment to the
Certificate of Incorporation.
RhoMed Authorized Shares -- By Articles of Amendment approved by RhoMed's
stockholders on April 4, 1996 and filed April 10, 1996, RhoMed amended its
Articles of Incorporation to increase its
F-18
<PAGE>
authorized common stock from 40,000,000 to 60,000,000 shares with no par
value. By Articles of Amendment approved by RhoMed's stockholders on
May 24, 1996 and filed June 7, 1996, RhoMed amended its Articles of
Incorporation to increase its authorized common stock from 60,000,000 to
90,000,000 shares with no par value. RhoMed has 10,000,000 shares of
authorized preferred stock, no par value.
Stock Transactions -- On March 4, 1996, the Board of Directors of
RhoMed authorized an offering of up to 40 units at $100,000 per unit, with
each unit consisting of 400,000 shares of RhoMed common stock at a purchase
price of $.25 per share (the "Common Stock Offering") (equivalent to 73,733
shares per unit at a purchase price of $1.36 per Palatin Common Stock share).
On May 14, 1996, the Board of Directors authorized an increase in the Common
Stock Offering of up to 100 units. Paramount served as placement agent for the
Common Stock Offering and received (i) a cash commission equal to 9% of the
gross proceeds from the sale of the units, (ii) a non-accountable expense
allowance equal to 4% of gross proceeds and (iii) placement agent's warrants
("Stock Offering Placement Agent Warrant"), equal to 10% of the common stock
issued in the Common Stock Offering, at an exercise price of $.30 per RhoMed
common stock share (equivalent to $1.63 per Palatin Common Stock share), which
are freely exercisable and terminate ten years from the date of issuance, have
certain registration rights, and are subject to adjustment in certain
circumstances. On June 24, 1996, RhoMed terminated the Common Stock Offering.
RhoMed sold 96.454 units, realizing net proceeds of approximately $8,391,000,
and issued 38,581,600 shares of RhoMed common stock (equivalent to 7,111,846
shares of Common Stock).
On June 24, 1996, and pursuant to the Merger, certain stockholders of
Interfilm prior to the Merger and third parties purchased 3,000,000 shares of
RhoMed common stock at a purchase price of $.25 per share, with net proceeds
to RhoMed of approximately $748,000 (equivalent to 552,997 shares of Common
Stock at a purchase price of $1.36). Also, and pursuant to the Merger,
warrants to purchase 1,500,000 shares of RhoMed common stock at an exercise
price of $.40 were issued to certain stockholders of Interfilm prior to the
Merger and third parties ("Merger Warrants") (equivalent to 276,499 shares of
Common Stock at an exercise price of $2.17). The Merger Warrants are
exercisable at any time, terminate four years from the date of issuance, have
certain registration rights, contain a call provision and are subject to
adjustment in certain circumstances.
In the ten months ended June 30, 1996, RhoMed issued 124,525 shares of
RhoMed common stock (equivalent to 22,954 shares of Common Stock) in exchange
for services, and Palatin issued 103,017 shares of Common Stock in exchange
for services. In addition, RhoMed has issued stock for accrued interest, and
Palatin is obligated to issue additional stock in payment of accrued interest
(see Note 6).
RhoMed commenced a private offering of preferred stock in fiscal year
1994, and a private offering of units consisting of RhoMed common stock and
common stock warrants in fiscal year 1995, both of which were terminated
without having raised the minimum required for closing. Stock issuance costs
incurred in connection with both offerings were expensed to operations in the
fiscal year in which such costs were incurred.
In February 1993, RhoMed issued a private offering memorandum for the
sale of securities, consisting of units of 10,000 shares of RhoMed common
stock for $10,000 per unit ($1.00 per share). RhoMed sold 58.4 units,
realizing net proceeds of approximately $577,000.
In September 1992, RhoMed issued a private offering memorandum for the
sale of securities, consisting of units of 33,333 shares of RhoMed common
stock for $25,000 per unit ($.75 per share). RhoMed sold 8 units, realizing
net proceeds of approximately $191,000.
F-19
<PAGE>
In December 1991, RhoMed issued a private offering memorandum for the
sale of units consisting of 26,289 shares of RhoMed common stock and a $20,000
note (see Note 8). Four units were sold for $25,000 per unit.
RhoMed common stock issuance prices represented market value of the
RhoMed common stock on the date of issuance.
Outstanding Stock Purchase Warrants -- At June 30, 1996, Palatin had the
following warrants outstanding, all of which are currently exercisable except
11,111 warrants included in "Other Warrants." Each warrant is restated as
Common Stock:
<TABLE>
<CAPTION>
Palatin Common Exercise Price Latest
Warrant Stock Shares per Share Termination Date
- - - -------------------------- -------------- -------------- ----------------
<S> <C> <C> <C>
Class A Offering 552,997 $ .05 9/13/05
Class A Placement Agent 82,949 .05 9/13/05
Class B Offering 156,683 .68 2/15/01
Class B Placement Agent 7,834 1.63 2/15/06
Stock Offering Placement Agent 711,184 1.63 6/25/06
Merger Warrants 276,499 2.17 6/24/00
Other Warrants 31,967 $2.71 - $70.50 10/20/99
---------- -------------- --------
Total 1,820,113 $ .05 - $70.50 6/25/06
========== ============== ========
</TABLE>
The Class B Offering and Merger Warrants contain provisions providing for
termination of the warrant if not exercised following notice of specified per
share trading prices.
Palatin Stock Option Plans -- Palatin had, prior to the Merger, adopted
its 1993 Equity Incentive Plan, pursuant to which options for 26,750 Common
Stock shares, calculated on a post-reverse stock split basis, were granted and
outstanding at June 30, 1996. Palatin does not intend to issue any new
options under the 1993 Equity Incentive Plan.
RhoMed Stock Option Plans -- RhoMed has 4 stock option plans, with
options granted thereunder constituting RhoMed Derivative Securities which,
pursuant to the Merger, were automatically converted into rights upon exercise
to receive Common Stock in the same manner in which the shares of RhoMed
common stock were converted.
Two RhoMed stock option plans are qualified "incentive stock option"
plans under the Internal Revenue Code, for which 8,250,000 shares of RhoMed
common stock were reserved. The other plans are nonqualified stock option
plans, for which 3,250,000 shares of RhoMed common stock were reserved.
Palatin does not intend to issue any new options under the RhoMed stock option
plans.
The table below presents options in RhoMed common stock, with
conversion to Common Stock shown as "Restated to Palatin Options." The
"Outstanding" and "Exercisable" as of June 30, 1996, are stated as Common
Stock. Information related to stock option activity under these plans for the
period from inception to June 30, 1996 is as follows:
F-20
<PAGE>
<TABLE>
<CAPTION>
Incentive Stock Options Nonqualified Stock Options
--------------------------------- -------------------------------
Number Number
of Shares Price per Share of Shares Price per Share
------------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Balance at inception - $ - - $ -
Granted 628,750 .50 - 1.00 1,053,179 .425 - 1.00
Terminated 37,000 1.00 2,500 1.00
------------- ------------- ---------- ------------
Outstanding, August 31, 1994 591,750 .50 - 1.00 1,050,679 .425 - 1.00
Granted 99,000 .35 196,400 .30 - 1.00
Terminated 36,000 1.00 - -
------------- ------------- ---------- ------------
Outstanding, August 31, 1995 654,750 .35 - 1.00 1,247,079 .30 - 1.00
Granted 7,601,204 .01 - .25 1,718,123 .01 - .25
Terminated 193,750 .25 - 1.00 57,000 1.00
------------- ------------- ---------- ------------
Outstanding, June 25, 1996 8,062,204 .01 - 1.00 2,908,202 .01 - 1.00
Conversion to Palatin Options (6,576,078) (2,372,126)
------------- ----------
Restated to Palatin Options 1,486,126 .05 - 5.42 536,076 .05 - 5.42
Palatin Options Outstanding, June 25, 1996 26,750 76.50 - 90.00 - -
------------- ------------- ----------- ------------
Outstanding, June 30, 1996 1,512,876 $.05 - $90.00 536,076 $.05 - $5.42
============= ============= ========== ============
Exercisable, June 30, 1996 214,472 $.05 - $90.00 225,453 $.05 - $5.42
============= ============= ========== ============
</TABLE>
No options have been exercised since inception.
(11) GRANTS, CONTRACTS AND ROYALTIES:
Pursuant to contract with the New Mexico Research and Development
Institute to develop products for medical research and diagnostic imaging, for
which all work has now been completed, the State of New Mexico earns (i) a 2%
royalty on gross revenues for products developed under the contract and
manufactured in New Mexico and (ii) a 5% royalty on products manufactured
outside New Mexico, subject to maximum repayment limits over specified time
frames.
RhoMed applies for and has received grants and contracts under the
Small Business Innovative Research (SBIR) program and other federally funded
grant and contract programs. Since inception, approximately $2,526,000 of
RhoMed's revenues have been derived from federally or state funded grants and
contracts. Under federal grants and contracts, there are no royalties or other
forms of repayment; however, in certain limited circumstances the government
can acquire rights to technology which is not being commercially exploited.
Most contract costs, including indirect costs, are subject to audit and
adjustment by negotiation with government representatives.
RhoMed also engages in contract development work with private sector
companies, both foreign and domestic. From inception to August 31, 1995,
RhoMed's contract revenues from such private sector companies are
approximately $335,000.
RhoMed has solicited and performed cooperative research and development
agreements with various national laboratories of the Department of Energy,
which did not involve any payment of funds to the Department of Energy or its
contractors by RhoMed and were cancelable by RhoMed upon less than six month's
notice to the relevant contractor.
(12) LICENSING AGREEMENTS:
RhoMed entered into a license agreement, effective November 2, 1992, with
Sterling Winthrop, Inc., a major pharmaceutical company ("Sterling"), under
which RhoMed granted to Sterling (i) a non-exclusive license to certain
patented radiolabeling technology for imaging uses and (ii) an option to
acquire a license on similar terms for therapeutic uses. The license
agreement is renewable annually and provides for certain license fee payments
to RhoMed together with milestone payments on product development and
percentage of sales production royalties. During the fiscal years ended
F-21
<PAGE>
August 31, 1995 and 1994, RhoMed received $50,000 in royalties and option
payments under the license agreement. During the fiscal year ended August 31,
1994, the license agreement was assigned by Sterling to Burroughs Wellcome
Co., a major pharmaceutical company, in conjunction with the purchase of
certain assets of Sterling by Burroughs Wellcome Co. Concurrently with
entering into the license agreement, RhoMed entered into a development
agreement, which expired December 31, 1993, with Sterling, under which RhoMed
performed specified product development services for $125,000, of which
$25,000 is included in grant and contract revenue for the fiscal year ended
August 31, 1994.
RhoMed entered into a license agreement, effective May 1, 1992, with
Rougier Bio-Tech Limited, a foreign biotechnology concern ("Rougier"), under
which RhoMed granted Rougier an exclusive license to certain patented
radiolabeling technology for a defined field-of-use. The agreement, which is
for the life of the patents and is renewable annually, provides for license
fee payments to RhoMed and percentage of sales production royalties with a
minimum annual royalty. Under this agreement, $7,500 of royalties and fees
were paid to RhoMed in the fiscal year ended August 31, 1995.
(13) INCOME TAXES:
Effective September 1, 1993, RhoMed adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Prior
to 1993, RhoMed accounted for income taxes following the provisions of
Accounting Principles Board Opinion No. 11.
RhoMed has had no income tax expense or benefit since inception because
of operating losses. Deferred tax assets and liabilities are determined based
on the estimated future tax effect of differences between the financial
statements and tax reporting basis of assets and liabilities, given the
provisions of the tax laws. A valuation allowance for the net deferred tax
assets has been recorded at June 30, 1996, based on the weight of evidence
that the deferred tax assets exceed the likely reversal of deferred tax
liabilities and likely taxable income. The difference between the expected
benefit of the federal tax rate of 34% and the actual benefit of zero is due
to this valuation allowance. Significant components of deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
June 30, 1996 August 31, 1995
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Payroll compensation accruals $ 39,887 $ 84,088
Restructuring accrual 55,484 -
Net operating losses 2,793,025 1,596,736
Other 43,710 32,766
----------- ------------
Total gross deferred tax assets 2,932,106 1,713,584
Less: Valuation allowance (2,915,557) (1,603,744)
----------- ------------
Deferred tax assets, net 16,549 109,840
----------- ------------
Deferred tax liabilities:
Basis difference in intellectual and
proprietary property (12,516) (109,291)
Other (4,033) (549)
----------- ------------
Total gross deferred tax liabilities (16,549) (109,840)
----------- ------------
Deferred tax assets (liabilities), net $ - $ -
=========== =============
</TABLE>
The Tax Reform Act of 1986 imposes limitations on the use of net
operating loss carryforwards if certain stock ownership changes occur. As a
result of the change in majority ownership relating to the Castle transaction
(see Note 3), the Common Stock Offering (see Note 10) and the Merger (see Note
1), under Internal Revenue Code Section 382, RhoMed most likely will not be
able to utilize its net operating loss carryforwards after the dates of
ownership change. Thus, Palatin most likely will not be able to realize the
benefit of any or all of RhoMed's net operating loss carryforwards in the
future.
F-22
<PAGE>
Furthermore, due to the Merger, Palatin applied to the Internal
Revenue Service to change its year end to June 30 from December 31. Internal
Revenue Service approval of this change is still pending.
Income tax returns for RhoMed for the years ended August 31, 1995 and
1994 have not been filed; however, management believes that since there is no
tax liability, there will be no material adverse effect on Palatin.
(14) COMPARISON WITH TEN MONTHS ENDED JUNE 30, 1995:
As noted above (see Note 1), Palatin changed its fiscal year end to
June 30. Therefore, the following June 30, 1995, selected financial
information, adjusted to reflect the amendment to the Certificate of
Incorporation of Palatin as if it had been filed on June 30, 1995, and as
if the Merger had been consummated on June 25, 1995, is presented
for comparative purposes only (unaudited):
Ten Months Ended
June 30,
-------------------------------------
1996 1995
------------ -------------
Revenues $ 24,457 $ 94,842
Expenses 2,779,573 1,076,473
Other income (expenses) (1,142,763) (305,615)
------------ ------------
Net loss $ (3,897,879) $ (1,287,246)
============ ============
Weighted average number of
common shares outstanding 2,144,131 1,230,550
============ ============
Net loss per common share $ (1.82) $ (1.05)
============ ============
F-23
<PAGE>
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,863,237 $ 6,791,300
Accounts receivable 267,870 4,574
Prepaid expenses and other 59,137 66,430
------------ ------------
Total current assets 5,190,244 6,862,304
Equipment, net of accumulated depreciation of
$222,174 and $183,535 as of March 31, 1997 and
June 30, 1996, respectively 186,008 96,354
Intangibles, net of accumulated amortization of
$98,782 and $91,336 as of March 31, 1997 and
June 30, 1996, respectively 75,940 82,547
------------ ------------
$ 5,452,192 $ 7,041,205
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216,572 $ 214,424
Accrued compensation owed to employees - 78,084
Accrued expenses 311,048 655,197
Current portion of long-term financing, including
accrued interest of $352,829 and $38,912 as of
March 31, 1997 and June 30, 1996, respectively 936,950 311,695
Senior bridge notes, including related party
transaction of $110,000 as of June 30, 1996 - 1,100,000
------------ ------------
Total current liabilities 1,464,570 2,359,400
Long-term financing, including accrued interest
of $0 and $273,339 as of March 31, 1997 and
June 30, 1996, respectively 968,527 1,727,619
Deferred license revenue 550,000 -
Notes payable to stockholders, including accrued
interest of $41,979 and $35,979 as of
March 31, 1997 and June 30, 1996, respectively 121,979 115,979
------------ ------------
Total liabilities 3,105,076 4,202,998
------------ ------------
Stockholders' equity:
Preferred stock, $.01, and 2,000,000 shares
authorized, as of March 31, 1997 and June 30, 1996;
and 30,630 and no shares issued as of March 31, 1997
and June 30, 1996, respectively 2,680,591 -
Common stock, $.01, and 25,000,000 shares authorized,
as of March 31, 1997 and June 30, 1996; and
11,753,978 and 11,538,777 issued as of March 31, 1997
and June 30, 1996, respectively 117,540 115,388
Treasury stock, 1,229 shares of Common Stock (1,667) (1,667)
Additional paid-in capital 11,018,039 10,804,394
Common stock earned but not issued 279,278 53,030
Unamortized deferred compensation (88,221) -
Deficit accumulated during the development stage (11,658,444) (8,132,938)
------------ ------------
Total stockholders' equity 2,347,116 2,838,207
------------ ------------
$ 5,452,192 $ 7,041,205
============ ===========
The accompanying notes to consolidated financial statements are an integral part of these balance
sheets.
</TABLE>
F-25
<PAGE>
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Inception
Three Months Ended March 31, Nine Months Ended March 31, (January 28, 1986)
____________________________ ___________________________ through
1997 1996 1997 1996 March 31, 1997
_____________ ____________ ___________ ___________ ____________________
<S> <C> <C> <C> <C> <C>
REVENUES:
Grants and contracts $ 267,862 $ - $ 267,862 $ - $ 3,128,374
License fees and royalties 350,000 - 350,000 - 684,296
Sales - 12,240 22,184 20,971 318,917
------------ ----------- ---------- ----------- ------------
Total revenues 617,862 12,240 640,046 20,971 4,131,587
------------ ----------- ---------- ----------- ------------
EXPENSES:
Research and development 1,050,400 242,212 2,300,669 557,955 6,697,077
General and administrative 793,370 405,111 1,740,125 1,107,061 6,759,086
Restructuring charge - 24,309 - 24,309 284,000
Net intangibles write down - - - - 259,334
------------ ----------- ----------- ----------- ------------
Total operating expenses 1,843,770 671,632 4,040,794 1,689,325 13,999,497
------------ ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSES):
Other income 36,330 - 159,023 - 230,403
Interest expense (84,927) (143,465) (301,200) (348,121) (1,344,386)
Placement agent commissions
and fees on debt offering - (101,541) - (135,341) (168,970)
Merger costs 17,419 (9,611) 17,419 (9,611) (507,581)
------------ ----------- ----------- ----------- ------------
Total other income
(expenses) (31,178) (254,617) (124,758) (493,073) (1,790,534)
------------ ----------- ----------- ----------- ------------
NET LOSS (1,257,086) (914,009) (3,525,506) (2,161,427) (11,658,444)
PREFERRED STOCK DIVIDEND (540,529) - (540,529) - (540,529)
------------ ----------- ----------- ----------- ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (1,797,635) $ (914,009) $(4,066,035) $(2,161,427) $(12,198,973)
============ =========== =========== =========== ============
Weighted average number of common
shares outstanding 11,745,837 1,294,792 11,618,271 1,290,451 1,948,514
========== ========= ========== ========= =========
Net loss per common share $ (0.15) $ (0.71) $ (0.35) $ (1.67) $ (6.26)
============ =========== =========== =========== ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
F-26
<PAGE>
PALATIN TECHNOLOGIES, INC
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Inception
March 31, (January 28, 1986)
_____________________ through
1997 1996 March 31, 1997
-------------- -------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,525,506) $ (2,161,428) $ (11,658,444)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 46,085 58,788 354,659
Interest expense on related-party debt 6,000 6,000 59,387
Accrued interest on long-term financing 226,248 247,407 1,022,286
Accrued interest on short-term financing (100,000) 93,510 7,936
Intangibles and equipment write down - - 278,318
Deferred license revenue 550,000 - 550,000
Accretion of compensatory options and warrants 116,078 - 116,078
Equity and notes payable issued for expenses - - 296,047
Settlement with consultant - - (28,731)
Changes in certain operating assets and liabilities:
Accounts receivable (263,295) (2,999) (267,869)
Prepaid expenses and other 7,293 (12,761) (59,137)
Intangibles (839) (15,833) (428,177)
Accounts payable 2,148 (82,329) 215,672
Accrued compensation owed to employees (78,084) 27,126 16,548
Accrued expenses (344,149) 27,097 339,779
-------------- -------------- ---------------
Net cash used for operating activities (3,358,021) (1,815,422) (9,185,648)
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (128,293) (9,513) (463,522)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party - - 302,000
Payments on notes payable, related party - (302,000) (309,936)
Proceeds from senior bridge notes payable - 1,850,000 1,850,000
Payments on senior bridge notes (1,000,000) - (1,850,000)
Proceeds from notes payable and long-term financing - - 1,951,327
Payments on notes payable and long-term financing (133,837) (45,000) (323,898)
Proceeds from paid-in capital from common
stock warrants 9,999 - 109,999
Proceeds from common stock, stock option
issuances and preferred stock, net 2,682,089 305,617 12,784,581
Purchase of treasury stock and fractional shares - - (1,667)
-------------- -------------- ---------------
Net cash provided by financing activities 1,558,251 1,808,617 14,512,407
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH (1,928,063) (16,318) 4,863,237
CASH and cash equivalents, beginning of period 6,791,300 46,768 -
-------------- -------------- ---------------
CASH and cash equivalents, end of period $ 4,863,237 $ 30,450 $ 4,863,237
============== ============== ===============
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
F-27
<PAGE>
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
For the Nine Months Ended March 31, 1997 and 1996
(1) NATURE OF BUSINESS
Through its wholly-owned subsidiary RhoMed Incorporated ("RhoMed"),
Palatin Technologies, Inc. (the "Company") is a development-stage
biopharmaceutical company dedicated to developing and commercializing products
and technologies for diagnostic imaging, cancer therapy and ethical drug
development utilizing peptide, monoclonal antibody and radiopharmaceutical
technologies. The Company was incorporated under the laws of the State of
Delaware on November 21, 1986. Since June 25, 1996, the effective date of the
merger (the "Merger") of a wholly-owned subsidiary of the Company with and
into RhoMed, all outstanding shares of RhoMed equity securities were exchanged
for the Company's common stock, $.01 par value per share (the "Common Stock").
The business of RhoMed represents the on-going business of the Company.
As a result of the Merger, RhoMed became a wholly-owned subsidiary of the
Company, with the holders of RhoMed preferred stock and RhoMed common stock
(including the holders of "RhoMed Derivative Securities" as hereafter defined)
receiving an aggregate of approximately 96% interest in the equity securities
of the Company on a fully-diluted basis. Additionally, all warrants and
options to purchase common stock of RhoMed outstanding immediately prior to
the Merger (the "RhoMed Derivative Securities"), including without limitation,
any rights underlying RhoMed's qualified or nonqualified stock option plans,
were automatically converted into rights upon exercise to receive the
Company's Common Stock in the same manner in which the shares of RhoMed common
stock were converted. Since the former stockholders of RhoMed retained more
than a 50% controlling interest in the surviving company (Palatin
Technologies, Inc.), the Merger was accounted for as a reverse merger. The
historical financial statements prior to June 25, 1996, are those of RhoMed,
except that the net loss per common share has been stated on an as if
converted basis.
Since its inception, RhoMed has devoted substantially all of its efforts
and resources to the research and development of its technology. RhoMed has
experienced operating losses in each year since its inception and, as of March
31, 1997, the Company, including its wholly-owned subsidiary RhoMed, had a
deficit accumulated during the development stage of $11,658,444. The Company
expects to incur additional operating losses over the next several years and
expects cumulative losses to increase as the Company's research and
development and clinical testing efforts continue and expand. The ultimate
completion of the Company's development projects is contingent upon a number
of factors, including the successful completion of technology and product
development, obtaining required regulatory approvals and additional financing
and, ultimately, successfully commercializing its products and achieving
profitable operations.
F-28
<PAGE>
(2) BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosure normally included in the Company's audited annual financial
statements has been condensed or omitted in the Company's interim financial
statements. In the opinion of the Company, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 1997 and
June 30, 1996, and the results of operations for the three and nine month
periods ended March 31, 1997 and 1996 and cash flows for the nine months ended
March 31, 1997 and 1996, and for the period from inception (January 28, 1986)
to March 31, 1997. The results of operations for the interim period may not
necessarily be indicative of the results of operations expected for the full
year, except that the Company expects to incur a significant loss for the
fiscal year ended June 30, 1997.
The accompanying financial statements and the related notes should be
read in conjunction with the Company's audited financial statements for the
ten months ended June 30, 1996 and the fiscal years ended August 31, 1995 and
1994 filed with the Company's Form 10-KSB for the transition period from
September 1, 1995 to June 30, 1996.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Research and Development Costs -- The costs of research and development
activities are expensed as incurred.
Net Loss per Common Share -- Net loss per common share is calculated
based upon the weighted average number of shares of Common Stock, on an as if
converted basis, outstanding during each period. All options and warrants
were excluded in the calculation of weighted average shares outstanding since
their inclusion would have had, in the aggregate, an anti-dilutive effect.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings per
Share." The statement is effective for financial statements for periods
ending after December 15, 1997, and changes the method in which earnings per
share will be determined. Adoption of this statement by the Company will not
have a material impact on earnings per share.
Revenue Recognition -- The Company recognizes revenue as follows: grants
and contracts - at the time such related expenses are incurred in compliance
with contractual terms; license fees and royalties - ratably over the term of
the license or royalty agreement; and sales - upon shipment of the product.
Use of Estimates -- The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-29
<PAGE>
(4) SENIOR BRIDGE NOTES:
On July 28, 1995, the Board of Directors of RhoMed authorized an offering
of up to 40 units at $25,000 per unit, with each unit consisting of a $25,000
face amount Senior Bridge Note and a Class A Warrant to purchase 75,000 shares
of RhoMed common stock (equivalent to 13,285 shares of Common Stock) at an
exercise price of $.01 per share (the "Class A Note and Warrant Offering").
The Senior Bridge Notes sold in the Class A Note and Warrant Offering (the
"Senior Bridge Notes") bore interest at 1% per month, and were payable, with
accrued interest, one year from the date of issuance. All of the 40 Class A
Note and Warrant Offering units were purchased with proceeds prior to
commissions and expenses of $1,000,000. In August and September of 1996, the
Senior Bridge Notes sold in the Class A Note and Warrant Offering were repaid
in full, totaling $1,000,000 of principal and $120,000 of accrued interest.
(5) SERIES A PREFERRED STOCK:
On December 2, 1996, the Company commenced an offering of units of Series
A Preferred Stock (the "Series A Offering") at a price of $100,000 per unit,
with each unit consisting of 1,000 shares of Series A Preferred Stock. As of
March 31, 1997, the Company had sold 30.63 units, representing 30,630 shares
of Series A Preferred Stock, for net proceeds to the Company of $2,680,591,
after deducting commission and other expenses of the Series A Preferred Stock
offering. The final closing on the Series A Offering was effective as of May
9, 1997, with the Company having sold an aggregate total of 137.78 units,
representing 137,780 shares of Series A Preferred Stock, for gross proceeds of
$13,778,000 and net proceeds to the Company of approximately $11,800,000,
after deducting commission and other expenses of the Series A Offering.
Each share of Series A Preferred Stock is convertible, at the option of
the holder thereof, into shares of Common Stock at a conversion price of
$1.24. The $1.24 represents a discount of 15% to the average closing bid
price of the Common Stock for the twenty (20) consecutive trading days
immediately preceding the final closing. The 15% discount has been reflected
in the Company's consolidated statement of operations as a dividend to Series
A Preferred Stock of $540,529. The Series A Preferred Stock also contains a
reset mechanism (see Part II, Item 2, "Change in Securities"). The Series A
Preferred Stock may be mandatorily converted by the Company, if, commencing
May 9, 1998, the closing bid price of the Common Stock exceeds 200% of the
then applicable conversion price for at least twenty (20) trading days in any
thirty (30) consecutive trading day period ending three (3) days prior to the
date of conversion.
In the event that the Company does not, by February 3, 1998, increase its
authorized capital to at least that number of shares of Common Stock necessary
for issuance upon exercise of all Series A Preferred Stock sold in the Series
A Offering, the Company has agreed that the holders of Series A Preferred
Stock shall be entitled, at the option of each holder to either: (i) require
the Company to repurchase all shares of Series A Preferred Stock then held by
such holder at $100.00 per share of Series A Preferred Stock, or (ii) require
the Company to purchase at fair market value that portion of the shares which
would have been issuable to the holder upon conversion but which the Company
was unable to issue due to the lack of authorized and reserved shares of
Common Stock. The fair market value per share of Common Stock shall be paid
in cash, or, if the Company does not have sufficient cash, then with secured
demand notes, the fair market value shall mean the closing bid price per share
of the Common Stock as quoted on the OTC Bulletin Board for the trading day
immediately preceding the conversion.
F-30
<PAGE>
As of March 31, 1997, the Company had sufficient Common Stock to convert
all Series A Preferred Stock outstanding. If the Company does not have a
sufficient number of authorized shares of Common Stock available for
conversion of all outstanding Series A Preferred Stock prior to the issuance
of the Company's financial statements for the fiscal year ending June 30,
1997, the Company will, as appropriate, classify the amount of Series A
Preferred Stock in excess of Common Stock available for conversion outside of
stockholders' equity.
The securities offered in the Series A Offering have not been registered
under the Securities Act of 1933, as amended, and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration requirements. The Company agreed to file, no later than July 8,
1997, a registration statement under the Securities Act to permit resales
of the Common Stock issuable upon conversion of the Series A Preferred Stock.
The Company is in the process of preparing such registration statement and
intends to file it as soon as practicable.
(6) EQUIPMENT:
Equipment consists of the following at March 31, 1997 and June 30, 1996:
March 31, June 30,
1997 1996
---------- --------
Office equipment $ 257,470 $ 202,960
Laboratory equipment 83,285 76,929
Leasehold improvements (not placed
in service) 67,427 -
---------- ---------
Equipment at cost 408,182 279,889
Less: Accumulated depreciation 222,174 183,535
---------- ---------
$ 186,008 $ 96,354
=========== ==========
(7) COMMITMENTS AND CONTINGENCIES:
Leases -- The Company leases certain of its facilities and equipment
under noncancellable operating leases. In October 1996, the lease on the
facility in Albuquerque, New Mexico was extended from March 31, 1997 until
August 31, 1997, and in March 1997, the lease was amended to provide for
optional extensions through December 31, 1997. In March 1997, the Company
entered into a ten-year lease on research and development facilities in
Edison, New Jersey, with the lease term expected to commence in July 1997.
Minimum future lease payments escalate from approximately $116,000 per year to
$200,000 per year after the fifth year of the lease term. The lease will
expire in fiscal year 2007.
F-31
<PAGE>
Merger Costs -- In conjunction with the Merger which occurred on June 25,
1996, costs of $525,000 were charged to operations for the ten months ended
June 30, 1996. With no additional Merger costs anticipated, the remaining
accrual of $17,419 was written off as of March 31, 1997.
Restructuring Charge -- In conjunction with the Company's decision to
consolidate and relocate its research and development facilities and executive
offices in the New Jersey area, the Company established a restructuring charge
of $284,000. The restructuring charge to date represents severance costs of
$115,000 and facility closing expenses of $169,000. Through March 31, 1997,
eight research and development and administration and management employees had
been severed. Facility closing expenses consist primarily of costs related to
lease termination and fixed asset disposals. Included in accrued expenses at
March 31, 1997, is $142,736 of remaining restructuring charge.
F-32
<PAGE>
[OUTSIDE BACK COVER OF PROSPECTUS]
- ------------------------------------------------------------------------------
DELIVERY OF PROSPECTUSES BY DEALERS
UNTIL ____________ ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------
No dealer, salesman or other person has been authorized to give information or
to make any representations not contained in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer of any
securities other than those to which it relates or a solicitation of an offer to
buy any of the securities offered hereby to any person in any jurisdiction in
which such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sales made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.
------------------------------------
TABLE OF CONTENTS
Item Page Number
Available Information.......................................Inside Front Cover
Incorporation By Reference..................................Inside Front Cover
Prospectus Summary......................................................1
The Company....................................................1
The Offering...................................................3
Risk Factors............................................................5
Use of Proceeds........................................................18
Market For Common Stock and Related Stockholder Matters................18
Capitalization.........................................................19
Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................20
Business...............................................................26
Management.............................................................42
Executive Compensation.................................................48
Principal Stockholders.................................................53
Certain Transactions...................................................59
Description of Securities..............................................61
Selling Stockholders...................................................65
Plan of Distribution...................................................75
Legal Matters..........................................................76
79
<PAGE>
Experts................................................................76
Changes In Accountants ................................................77
Financial Statements...................................................78
Delivery of Prospectuses By Dealers.........................Outside Back Cover
Table of Contents...........................................Outside Back Cover
80
<PAGE>
PART II. INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation, or serving at the request of the corporation in similar capacities,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of an action
or suit by or in the right of the corporation, no indemnification shall be made
with respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the court having jurisdiction shall determine that such person is fairly and
reasonably entitled to indemnity.
Article V, Section 3 of the Company's Certificate of Incorporation
provides that to the fullest extent permitted by the Delaware General
Corporation Law, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of a fiduciary duty
as a director.
Article VI of the Company's Certificate of Incorporation provides that
the Company shall make the indemnification permitted under Section 145 of the
Delaware General Corporation Law, as summarized above, but only (unless ordered
by a court) upon a determination by a majority of a quorum of disinterested
directors, by independent legal counsel in a written opinion, or by the
stockholders, that the indemnified person has met the applicable standard of
conduct. Article VI further provides that the Company may advance expenses for
defending actions, suits or proceedings upon such terms and conditions as the
Company's Board of Directors deems appropriate, and that the Company may
purchase insurance on behalf of indemnified persons whether or not the Company
would have the power to indemnify such persons under Section 145 the Delaware
General Corporation Law.
The Company's Bylaws contain substantially the same indemnification
provisions as the Company's Certificate of Incorporation, summarized above.
The Company's employment agreement with Edward J. Quilty requires the
Company to indemnify and advance expenses to Edward J. Quilty, the Company's
Chairman of the Board, President and Chief Executive Officer, to the fullest
extent permitted under Section 145 of the Delaware General Corporation Law.
Each of the agreements pursuant to which Selling Stockholders acquired
Offered Shares from the Company provides that the Company will indemnify each
Selling Stockholder, and each Selling Stockholder will indemnify the Company,
and in some cases the Company's directors, officers and control persons, against
certain liabilities which might arise from the Offering. The indemnifications
may cover liabilities arising under the Securities Act. The obligation of a
Selling Stockholder to indemnify the Company or its affiliates is (absent fraud)
limited to liabilities based on
Part II - 1
<PAGE>
written information which the Selling Stockholder provides to the Company for
inclusion in the Registration Statement.
The Company has obtained a directors' and officers' liability insurance
policy which covers, among other things, certain liabilities arising under the
Securities Act.
Item 25. Other Expenses of Issuance and Distribution.
The Company will bear all expenses, estimated at $[_________], incurred
in connection with the registration of the Offered Shares under the Securities
Act and qualification or exemption of the Offered Shares under state securities
laws, excluding fees of legal counsel for any Selling Stockholder. Each Selling
Stockholder will pay all underwriting discounts and selling commissions
applicable to the sale of the Selling Stockholder's Offered Shares.
registration fees $7,565
federal taxes $0
states taxes and fees $0
trustees' and transfer agents' fees $_
costs of printing and engraving $10,000*
legal fees $_*
accounting fees $15,000*
engineering fees $0
listing fees $0
miscellaneous $_*
- ------------------
* To be filed by amendment.
Item 26. Recent Sales of Unregistered Securities.
During the three years preceding the date of this registration statement, the
Company sold securities of the following classes without registering the
securities under the Securities Act, all in non-underwritten transactions:
1. Series A Convertible Preferred Stock. The Company sold restricted
shares of Series A Convertible Preferred Stock to a total of 211 accredited
investors in a private placement and claimed exemption under Rule 506 of
Regulation D under the Securities Act. The Company offered and sold the
securities solely to accredited investors (as defined in Regulation D) and made
no public solicitation. Transfer of the Series A Convertible Preferred Stock is
restricted and the certificates representing Series A Convertible Preferred
Stock bear a restrictive legend. Each purchaser represented to the Company that
the purchaser was purchasing the Series A Convertible Preferred
Part II - 2
<PAGE>
Stock for the purchaser's own account for investment and not with a view toward
resale or distribution to others.
NUMBER OFFERING CASH COM-
DATE OF SALE OF SHARES PRICE MISSIONS(1)
- -------------------- ---------- -------------- -------------
February 21, 1997 30,630 $3,063,000 $398,190
April 3, 1997 76,225 $7,622,500 $990,925
May 9, 1997 30,925 $3,092,500 $402,025
TOTALS: 137,780 $13,778,000 $1,791,139
(1) Includes commission of 9% and non-accountable expense allowance of 4%. Does
not include Preferred Stock Placement Warrants, described below.
2. Preferred Stock Placement Warrants. The Company issued Preferred
Stock Placement Warrants to purchase an aggregate of 13,778 shares of Series A
Convertible Preferred Stock to the Placement Agent and/or its designees, as part
of the Placement Agent's compensation in connection with the sales of Series A
Convertible Preferred Stock described above. The Company will receive a nominal
cash price for the Preferred Stock Placement Warrants of $13.78 ($.001 per share
of Series A Convertible Preferred Stock issuable). The Preferred Stock Placement
Warrants are exercisable for a period of five (5) years starting in November
1997, at a price of $110 per share of Series A Convertible Preferred Stock (110%
of the offering price of Series A Convertible Preferred Stock in the offering
described above), and include a cashless exercise provision. The Company claimed
exemption under Rule 506 of Regulation D under the Securities Act. The Company
issued the securities solely to directors, officers, employees, salespersons, or
other affiliates of the Placement Agent (including two accredited investors who
purchased Series A Convertible Preferred Stock in the offering described above)
and made no public solicitation. Transfer of the Preferred Stock Placement
Warrants is restricted and the warrant agreements bear a restrictive legend.
3. Common Stock issued on exercise of Class A Warrants. The Company has
sold a total of 96,770 restricted shares of Common Stock upon exercise of the
Company's outstanding Class A Warrants to six exercising warrant holders. The
Company claimed exemption under Section 4(2) of the Securities Act, for a
transaction not involving any public offering. Before the sales on exercise of
Class A Warrants listed below, there were 22 holders of Class A Warrants, each
of whom purchased the Class A Warrants from RhoMed in a private offering to
accredited investors only, in compliance with Rule 506 of Regulation D. In the
Merger, the Company assumed the obligation to issue Common Stock upon exercise
of the Class A Warrants at approximately $.0542 per share. Each exercising
warrant holder had held the warrant for more than one year before exercising.
Transfer of both the Class A Warrants and Common Stock issued on exercise of
Class A Warrants is restricted and the warrants and the certificates
representing Common Stock issued on exercise of Class A Warrants bear
restrictive legends. The Company sold the Common Stock directly to the
exercising warrant holders, with no discount or commission.
Part II - 3
<PAGE>
NUMBER OFFERING CASH COM-
DATE OF SALE OF SHARES PRICE MISSIONS
- -------------------- ---------- -------------- -----------
October 28, 1996 27,649 $1,500 $0
November 21, 1996 27,649 $1,500 $0
December 9, 1996 13,824 $750 $0
January 10, 1997 13,824 $750 $0
February 14, 1997 13,824 $750 $0
TOTALS: 96,770 $5,250 $0
4. Common Stock issued on exercise of employee stock options. The
Company has sold a total of 191,673 restricted shares of Common Stock to Edward
J. Quilty (the Company's Chairman of the Board and Chief Executive Officer) upon
partial exercise of an option granted to Mr. Quilty pursuant to his employment
agreement. The Company claimed exemption under Section 4(2) of the Securities
Act, as a transaction not involving any public offering. The stock subject to
the option is offered only to Mr. Quilty, at approximately $.0542 per share. The
option is not transferable during Mr. Quilty's lifetime and Common Stock issued
on exercise of the option is restricted. The certificates representing Common
Stock issued on exercise of the option bear restrictive legends. The Company
sold the Common Stock directly to Mr. Quilty with no discount or commission.
NUMBER OFFERING CASH COM-
DATE OF SALE OF SHARES PRICE MISSIONS
- -------------------- ---------- -------------- -------------
November 11, 1996 119,796 $6,499 $0
April 11, 1997 71,877 $3,899 $0
TOTALS: 191,673 $10,398 $0
5. Common Stock issued to pay interest obligation. On April 30, 1997,
the Company sold 255,641 restricted shares of Common Stock to Bioquest Venture
Leasing Partnership L.P., the designee of Aberlyn, a creditor of the Company, as
payment in full of $303,171 of accrued interest which the Company owed Aberlyn
under a financing arrangement. The Company claimed exemption under Section 4(2)
of the Securities Act, for a transaction not involving any public offering. This
was a one-time transaction negotiated at arm's length between the Company and
its largest creditor. The Common Stock issued as payment of interest is
restricted and the certificate representing the Common Stock bears a restrictive
legend. Aberlyn represented to the Company that Aberlyn and its designee were
accredited investors (as defined in Regulation D) and that Aberlyn or its
designee was acquiring the stock for its own account and not with a view to or
for sale in connection with any distribution of the Common Stock in violation of
the Securities Act. The Company sold the Common Stock directly to Aberlyn's
designee with no discount or commission.
Part II - 4
<PAGE>
6. Series A Preferred Stock issued in connection with the Merger. On
June 25, 1996, in connection with the Merger, the Company issued 40,000
restricted shares of Series A Preferred Stock (not the same series as the Series
A Convertible Preferred Stock referred to in paragraph 1 of this Item 26) in
exchange for 4,000,000 shares of RhoMed preferred stock. The Company claimed
exemption under Section 3(a)(10) of the Securities Act, for securities issued in
exchange for outstanding securities, after a hearing on the fairness of the
terms of the transaction as contemplated in Section 3(a)(10). On June 12, 1996,
the California Department of Corporations issued a permit for the exchange of
securities in the Merger, following a hearing upon the fairness of the terms and
conditions of the exchange offer. On July 19, 1996, the Series A Preferred
Stock, which was uncertificated, automatically converted into 1,867,809 shares
of unrestricted Common Stock by operation of the Company's Certificate of
Incorporation. The Merger exchange was solely stock-for-stock and did not
involve any cash payments (other than cashing out fractional shares on issuance
of Common Stock), discounts or commissions.
7. Series B Preferred Stock issued in connection with Merger. On June
25, 1996, in connection with the Merger, the Company issued 495,515.51
restricted shares of Series B Preferred Stock in exchange for 49,558,217 shares
of RhoMed common stock. The Company claimed exemption under Section 3(a)(10) of
the Securities Act, for securities issued in exchange for outstanding
securities, after a hearing on the fairness of the terms of the transaction as
contemplated in Section 3(a)(10). On June 12, 1996, the California Department of
Corporations issued a permit for the exchange of securities in the Merger,
following a hearing upon the fairness of the terms and conditions of the
exchange offer. On July 19, 1996, the Series B Preferred Stock, which was
uncertificated, automatically converted into 9,133,838 shares of unrestricted
Common Stock by operation of the Company's Certificate of Incorporation. The
Merger exchange was solely stock-for-stock and did not involve any cash payments
(other than cashing out fractional shares on issuance of Common Stock),
discounts or commissions.
8. Series B Preferred Stock issued to pay fee. On June 25, 1996, the
Company issued 5,588.6860985 restricted shares of Series B Preferred Stock to
the designees of Wharton Capital Corp., to pay a fee pursuant to an agreement
between Wharton Capital Corp. and RhoMed. The Company claimed exemption under
Section 4(2) of the Securities Act, for a transaction not involving any public
offering. On July 19, 1996, the Series B Preferred Stock, which was
uncertificated, automatically converted into 103,017 shares of restricted Common
Stock by operation of the Company's Certificate of Incorporation. The
certificates representing the Common Stock bear restrictive legends. The Company
sold the Series B Preferred Stock directly to Wharton Capital Corp. with no cash
payment and no discount or commission.
Item 27. Exhibits.
EXHIBITS
The following exhibits are filed with this Registration Statement, or
incorporated by reference as noted:
2.1 Agreement and Plan of Reorganization dated as of April 12, 1996 by and
between Interfilm, Inc., Interfilm Acquisition Corp. and RhoMed
Incorporated. (a)
Part II - 5
<PAGE>
2.2 Waiver and Consent dated as of June 24, 1996, between Interfilm, Inc.,
Interfilm Acquisition Corp. and RhoMed Incorporated. (b)
3.1 Restated Certificate of Incorporation of the Company, as filed with
the Delaware Secretary of State on November 3, 1993. (c)
3.2 Amendment to the Restated Certificate of Incorporation of the Company,
as filed with the Delaware Secretary of State on July 19, 1996. (d)
3.3 Bylaws of the Company. (e)
3.4 Amended Certificate of Designation of Series A Convertible Preferred
Stock of the Company, filed on June 24, 1996. (f)
3.5 Amended Certificate of Designation of Series B Preferred Stock of the
Company, filed on June 24, 1996. (g)
3.6 Certificate of Designation of Series A Convertible Preferred Stock of
the Company, filed on February 21, 1997. (e)
4.1 Specimen Certificate for Common Stock. (h)
4.2 Patent Assignment and License Agreement dated as of July 15, 1993,
between RhoMed Incorporated and Aberlyn Capital Management Limited
Partnership. (b)
4.3 Master Lease Agreement dated November 16, 1994, between RhoMed
Incorporated and Aberlyn Capital Management Limited Partnership. (b)
4.4 Letter Agreement, dated as of April 28, 1995, between Aberlyn Capital
Management Limited Partnership and RhoMed Incorporated. (b)
4.5 Stock Purchase and Modification Agreement, dated as of June 24, 1996,
between Aberlyn Capital Management Limited Partnership, Aberlyn
Holding Company, Inc. and RhoMed Incorporated. (b)
4.6 Specimen Certificate for Series A Convertible Preferred Stock. (e)
5.1 Opinion of Rubin Baum Levin Constant & Friedman, counsel to the
Company, re: legality. (i)
7.1 Opinion of Rubin Baum Levin Constant & Friedman, counsel to the
Company, re: liquidation preference. (Included in Exhibit 5.1). (i)
10.01 Lease between Charles C. and Ellen C. France Revocable Trust and
RhoMed Incorporated dated December 18, 1992. (b)
10.02 Amendment, dated November 1, 1993, to Lease between Charles C. and
Ellen C. France Revocable Trust and RhoMed Incorporated. (b)
10.03 Second Amendment, dated July 5, 1996, to Lease between Charles C. and
Ellen C. France Revocable Trust and RhoMed Incorporated. (b)
10.04 RhoMed Incorporated 1995 Employee Incentive Stock Option Plan. (b)
10.05 RhoMed Incorporated 1995 Nonqualified Stock Option Plan. (b)
Part II - 6
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10.06 1996 Stock Option Plan of the Company. (e)
10.07 Employment Agreement dated as of November 16, 1995, between RhoMed
Incorporated and Edward J. Quilty. (b)
10.08 Employment Agreement dated as of September 27, 1996, between Palatin
Technology, Inc. and Carl Spana. (b)
10.09 Employment Agreement dated as of September 27, 1996, between Palatin
Technology, Inc. and Charles Putnam. (b)
10.10 Class C Warrant for the Purchase of Shares of Common Stock issued to
William I. Franzblau June 24, 1996. (b)
10.11 License Agreement between Rougier Bio-Tech Limited and RhoMed
Incorporated dated May 1, 1992. (b)
10.12 License Agreement between Sterling Winthrop Inc. and RhoMed
Incorporated dated November 2, 1992. (b)
10.13 Assignment and Assumption dated January 21, 1994, between Sterling
Winthrop, Inc. and Burroughs Wellcome Co. (b)
10.14 Option Agreement between RhoMed Incorporated and The Wistar Institute
of Anatomy and Biology dated August 22, 1996. (b)
10.15 Consulting Agreement dated as of March 7, 1995, between RhoMed
Incorporated and Buck A. Rhodes. (b)
10.16 Form of Class A Warrant. (b)
10.17 Form of Placement Agent Warrant for the Class A Offering. (b)
10.18 Form of Unit Purchase Agreement for the Class A Offering, including
registration rights referred to in the Form of Class A Warrant and
Form of Placement Agent Warrant for the Class A Offering. (b)
10.19 Form of Class B Warrant. (b)
10.20 Form of Placement Agent Warrant for the Class B Offering. (b)
10.21 Form of Unit Purchase Agreement for the Class B Offering, including
registration rights referred to in the Form of Class B Warrant and
Form of Placement Agent Warrant for the Class B Offering. (b)
10.22 Form of Placement Agent Warrant for the RhoMed Common Stock Offering.
(b)
10.23 Form of Common Stock Purchase Agreement for the RhoMed Common Stock
Offering, including registration rights referred to in the Form of
Placement Agent Warrant for the RhoMed Common Stock Offering. (b)
10.24 Lease between Adelante Development Center, Inc. and Palatin
Technologies, Inc. dated October 10, 1996.(j)
Part II - 7
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10.25 License Option Agreement dated as of December 18, 1996, between
Palatin Technologies, Inc. and Nihon Medi-Physics Co. Ltd. (k)
16.1 Letter dated July 19, 1996 from Deloitte & Touche LLP. (l)
21.1 Current list of subsidiaries of the registrant. (b)
23.1 Consent of Rubin Baum Levin Constant & Friedman. (Included in Exhibit
5.1.)
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney. (Included on the signature page of this
Registration Statement.)
27.1 Financial Data Schedule. (e)
99.1 Certificate of Limited Partnership of "The Interfilm Stockholders
Limited Partnership," as filed with the Delaware Secretary of State on
June 17, 1996. (b)
99.2 Agreement of Limited Partnership of The Interfilm Stockholders Limited
Partnership, dated June 11, 1996. (b)
99.3 The Interfilm Stockholders Trust, established by Interfilm, Inc. and
Interfilm Technologies, Inc. on June 11, 1996. (b)
99.4 General Bill of Sale, Assignment and Assumption Agreement among, on
the one hand, Interfilm, Inc. and Interfilm Technologies, Inc. and on
the other hand, The Interfilm Stockholders Limited Partnership, dated
June 25, 1996. (b)
NOTES TO EXHIBITS
(a) Incorporated by reference to Exhibit 2.1 of the registrant's Form 8-K
dated June 25, 1996, filed with the Commission on July 10, 1996.
(b) Incorporated by reference and previously filed as an exhibit to the
registrant's Form 10-KSB Annual Report for the period ended June 30,
1996, filed with the Commission on September 27, 1996.
(c) Incorporated by reference to Exhibit 3.1 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(d) Incorporated by reference to Exhibit 3.2 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(e) Incorporated by reference and previously filed as an exhibit to the
registrant's Form 10-QSB/A Amendment No. 2 for the quarter ended March
31, 1997, filed with the Commission on July 17, 1997
(f) Incorporated by reference to Exhibit 3.3 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(g) Incorporated by reference to Exhibit 3.4 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
Part II - 8
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(h) Incorporated by reference to Exhibit 4.1 of the registrant's Form 8-K
dated July 19, 1996, filed with the Commission on August 9, 1996.
(i) To be filed as an exhibit to this Registration Statement by amendment.
(j) Incorporated by reference to Exhibit 10.24 of the registrant's Form 10-
QSB for the quarter ended September 30, 1996, filed with the Commission
on November 13, 1997
(k) Incorporated by reference to Exhibit 10.25 of the registrant's Form 10-
QSB/A for the quarter ended December 31, 1996, filed with the Commission
on April 24, 1996
(l) Incorporated by reference to Exhibit 16.1 of the registrant's Form 8-K/A
dated June 25, 1996, filed with the Commission on July 23, 1996.
Item 28. Undertakings.
The Company will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial bona
fide offering thereof.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Part II - 9
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Princeton, State of New Jersey, on August 13, 1997.
PALATIN TECHNOLOGIES, INC.
By: /s/ Edward J. Quilty
---------------------------
Edward J. Quilty
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Palatin Technologies, Inc.,
severally constitute Edward J. Quilty and John J. McDonough, and each of them
singly, our true and lawful attorneys with full power to them, and each of them
singly, to sign for us and in our names in the capacities indicated below, the
Registration Statement on Form SB-2 filed herewith and any and all subsequent
amendments to said registration statement, and generally to do all such things
in our names and behalf in our capacities as officers and directors to enable
Palatin Technologies, Inc. to comply with all requirements of the Securities and
Exchange Commission.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed below by the following persons in the
capacities and on the date stated.
SIGNATURE TITLES DATE
/s/ Edward J. Quilty
-------------------- Chairman of the Board, President August 13, 1997
Edward J. Quilty and Chief Executive Officer
(principal executive officer)
/s/ Carl Spana
-------------------- Executive Vice President and August 13, 1997
Carl Spana Director
/s/ John J. McDonough
-------------------- Vice President and Chief Financial August 13, 1997
John J. McDonough Officer (principal financial and
accounting officer)
-------------------- Director August 13, 1997
Michael S. Weiss
Part II - 10
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/s/ James T. O'Brien
-------------------- Director August 13, 1997
James T. O'Brien
/s/ Richard J. Murphy
-------------------- Director August 13. 1997
Richard J. Murphy
/s/ John K.A. Prendergast
-------------------- Director August 13, 1997
John K.A. Prendergast
Part II - 11
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 31, 1996 and to reference to our firm under the changes in
accountants and experts sections included in or made a part of this registration
statement.
/s/ ARTHUR ANDERSEN
Albuquerque, New Mexico
August 11, 1997
